Money doesn't actually talk. We do.

What The Fed Rate Cut Means For You

The granddaddy of all banks — the Federal Reserve — just cut interest rates by a half point. That means several of the rates in our lives will also fall, some for the better (home-equity lines of credit) and others for worse (certificates of deposit).

First, a quick lesson: The Fed controls short-term interest rates. The prime rate – or the benchmark rate banks use to price many consumer loans – tracks short-term rates. Shortly after the Fed makes a move, the consumer banks tweak their prime rates accordingly. The Fed sliced rates to 4.75% from 5.25% (it was the Fed’s first move since it stopped a string of rate increases that lasted through June, 2006). That means the prime rate — which generally runs about 3 percentage points higher — should drop to 7.75% from 8.25%.

Here’s what it means for us: Rates on home-equity lines of credit will fall in tandem with the prime rate. The prevailing rate for home-equity loans may also drop, though it doesn’t always happen (and since rates are fixed, it will only impact borrowers taking out new loans). Credit cards with variable rates should fall, though card companies can be slow to pass on those savings (funny how they quickly get their act together when rates rise). Auto loans will probably drop as well.

And for the bad news: Rates on certificates of deposit and money-market accounts, which are still pretty darn attractive, will ease. Ditto for many other savings accounts.

Fixed-rate mortgages aren’t directly tied to the rates controlled by the Fed — they track the yield of the ten-year Treasury bond. But the ten-year bond doesn’t exactly live in a vacuum. If the Fed cuts rates, it’s usually a signal that the economy isn’t doing so hot or could use a little boost. That could cause the bond market to rally – pushing bond prices up and yields down – which means mortgage rates should also eventually drop. That may not help you, however, if you can’t get a loan at all thanks to recently tightened credit standards.

Adjustable-rate mortgage rates, meanwhile, can track the one-year Treasury or the London interbank offered rate (Libor). The yield on the one-year has been falling, so borrowers facing an adjustment may not feel as much pain as they may have earlier this year. Libor has recently eased, but remains at elevated levels relative to the Treasury.

Of course, the decline in rates reflects a more macro picture as well. Wall Street pros will undoubtedly hang on every word uttered by Ben Bernanke, the Fed chairman, as they try and divine how badly he thinks the mortgage mess has oozed into the rest of the economy – and what the Fed might do next to try and contain it.

Stay tuned.

–Tara Siegel Bernard