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How I’m Reacting to the Rate Cut

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Fed Cuts Rate to 0-0.25%The Fed announced in their December FOMC that they were lowering their target federal funds rate “range” to 0.00% to 0.25%, a drop from the former target of 1.00%. While it was seen as mostly a symbolic move, since the actual federal funds rate was much lower than 1.00%, the language surrounding the numbers made it sound like the Fed was willing to do anything to pump up liquidity, including doing something its never done before called quantitative easing. I don’t want to get into the technicalities of everything because for most people, the biggest part of that announcement was that interest rates are going lower.

When the Fed cuts interest rates, the first thing that happens is interest rates on all banking products will go down. As you may remember, savings rates aren’t guaranteed and are variable, they can change at anytime. The same is true for the interest rates on checking accounts, money market accounts, etc. The only rate that is ever guaranteed is on a certificate of deposit (CD) and that’s only locked for the term of the CD.

Emergency Fund

I currently have our emergency fund laddered in CDs at ING Direct so there will be no changes there. I’ve been slowly rolling over CDs each month into an FNBO Direct CD because their one year rates are half a percent higher (FNBO Direct 12-month CDs are 4.00% APY vs. ING Direct 12-month CDs at 3.50% APY), but it’s been slow going since only one CD matures per month. If you don’t have your emergency fund locked into a CD ladder, you should consider it.

Mortgage Rates

Mortgage rates are falling hard. My friend emailed to let me know that his broker has rates for 30-year loans at 4.50% and Wells Fargo has 4.75% listed on their list of today’s rates. Under 5% for a thirty-year loan is absolutely ridiculous. While we’re not in the position to buy another home, if you were waiting on the fence, now is a fantastic time to start looking because the rates are so low. If and when we do have the ability, I hope that these low rates are still around.

Regular Savings

The only rates that will stick are those promotional rates guaranteed by banks. The best example I can think of is Everbank, they’re guaranteeing their 4.01% bonus rate for three months but then they’re going to drop you back down to whatever it is the rates will fall to. Does that mean you should rush out and open an Everbank account? Not necessarily, because we won’t know what the rate is afterwards but that’s the type of high yield savings account that will guarantee a rate for a specified time and still give you the flexibility of moving your funds around. If you don’t lock it into a CD, your rate can change at anytime.

Who knows what will happen in the next few months to the next year with regard to our economy, but the one thing you can be sure of is that banks will be lowering interest rates in the short term.

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11 Responses to “How I’m Reacting to the Rate Cut”

  1. poor boomer says:

    How I’m reacting to the rate cut:

    *shrug*

  2. Bill M. says:

    Same here, because I took out a home equity line of credit to do some home upgrades, I need to pay that off too, will do that at the end of 09, hopefully the 4.0-5.0 mortgage will still be around so I can cash in also.

  3. Broke MBA says:

    I too hope these type of mortgage rates are around a year from now. I’m just not ready to buy yet. I have some student loan debt and a down-payment to tend to first.

  4. Jon says:

    Spend, Spend and Spend more is the government’s message. In terms of housing, loans are so cheap now that refinancing is a great option as well. If only house prices would stabalize!

  5. Andy says:

    [Recommenting with correct profile] Spend, Spend and Spend more is the government’s message. In terms of housing, loans are so cheap now that refinancing is a great option as well. If only house prices would stabalize!

  6. mbhunter says:

    30-year notes at that rate are fantastic inflation hedges.

  7. poor boomer says:

    Jon said:

    Spend, Spend and Spend more is the government’s message. In terms of housing, loans are so cheap now that refinancing is a great option as well. If only house prices would stabalize!

    What good are cheap loans to people who can’t get loans? All it means to me is that I pay a larger Landlord Spread Premium for the privilege of renting a room in a house with nine people.

  8. Patrick says:

    I agree with MBHunter on the 30 year notes. It isn’t unreasonable to estimate inflation rates at 4-5% when you are planning your future. So a locked in mortgage at those rates is excellent.

    My friend just told me his bank was offering him the chance to refinance his 30 year loan to a 15 yr mortgage in the low 4% range. He is laying the groundwork now so he can run the numbers. But it looks like he may come out ahead.

  9. Anonymous says:

    Why isn’t FNBO listed as having top rates on interest on bankrate.com? And why aren’t the CD rates easy to find on FNBO’s own website? One of the ways I judge a bank is by its website – I want to be able to quickly find changes in rates online, and I’m just not seeing the information on their website. I’m interested in this, but just feeling cautious.

    • jim says:

      @Anonymous: If you look at Bankrate’s list, you’ll notice that the first few are links and the rest aren’t. The first few on their tables are also not always the highest links, that’s because they order things based on whether they have a commercial relationship. I mentioned FNBO Direct and ING Direct because those are two banks I use and I could easily pull their rates up.

      As for why FNBO makes it difficult, and they do, I don’t fully understand. I agree with you that when a bank makes it hard (or rather doesn’t make it easy, because I doubt banks actively make it hard to find rate information) it makes me question them, but I’ve been using FNBO for a whiel and have otherwise been happy with them.

      Here’s the link to their CD rates:
      https://www.fnbodirect.com/01d/html/en/site/assets/documents/etemplate/cd/index.html

  10. Peter says:

    I keep meaning to call about refinancing our mortgage. Looks like now may be the time. Time to do it before they go back up!


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