what does it mean that the Fed cuts interest rates?

[Anonymous]

http://www.bankrate.com/brm/news/bank/20021025a.asp?prodtype=mtg

The first few paragraphs are a good explanation of how mortgage rates work, note that it was written in 2002.  Bottom line is mortgage rates are tied more to the economy.  If investors believe the economy will improve, they will move money from T-bills to the stock market (rates increase).  If investors believe the economy will get worse, they will move money from the stock market to T-bills (rates decrease).

What the fed is doing is trying to save the economy from plunging too far (providing liquidity to banks for lending), but economic indicators coming will really determine how investors feel the economy will go.

My guess, the economy is just starting to feel the pain...

[haulingthescoreup]

When the Fed cuts its rates, the Wall Street Journal prime rate drops by the same amount, generally in a few days. The two aren't officially linked, but the prime does seem to always follow. (The prime rate is basically what leading banks would charge on corporate loans.)

What it means for consumers is that anyone who has a variable rate that is tied to the prime --maybe on a mortgage, a home equity line of credit, a regular line of credit, a credit card --will see their rate drop within a certain period of time after the prime drops. It's usually HELOC's and CC's that follow the prime.

So for instance, I have a HELOC whose rate is 0.95% below prime. If there are any changes in the rate during the month, the new rate is posted on my account at the end of the month. We've had two drops in the Fed rate this month (the second one today), and if the prime drops to 6% at some point tomorrow (the 31st), next month's interest on the HELOC will be 5.05%. If you have a variable rate CC, and your rate is prime + 3.99%, its rate will adjust to 9.99%. And so on.

One of the banks recently weaseled out a little notice that they would delay dropping their rates by 3 months after any adjustment, so their card holders won't see any changes for a while.

[haulingthescoreup]

This morning prime is now showing as 6%:

http://online.wsj.com/mdc/public/page/2_3020-moneyrate.html