If Interest Rates Are Going Down, Where is the Relief?

We all hear the headlines every time Ben Bernanke speaks, the man lauded as having the sole power to affect our economic future by raising or lowering “interest rates.” Yet as he wages his slashing campaign against the evils of higher interest rates, many Americans are getting notices in their mailbox – adjustable rate mortgages are resetting at rates up to 3% higher, pulling hundreds of dollars each month out of wallets at a time when gasoline is rocketing to four bucks, taking loaves of bread and gallons of milk with it.
Still, we see the stock market lurch forward as the government announces their latest move to ensure economic growth, and the headlines talk about how things will get better. Better for whom? How, then, do the Fed’s moves on interest rates affect things like credit card and mortgage rates?

First of all, the rate that the Fed moves is known as the overnight lending rate, or the “Fed funds” rate – the interest rate that banks pay on very short-term loans that allow them to secure enough capital to keep operating. Yes, banks do occasionally “run out” of money temporarily, just by the nature of the business. A lower overnight lending rate allows banks to borrow more short-term capital, and inject it into more loans – which causes more people to borrow, spend money, create jobs, and thus stimulate economic growth. The “prime rate” mirrors the overnight lending rate, only a little higher. You will notice that one-year yields on bank CDs are almost identical to the overnight lending rate, although in recent months, banks have lowered them a little faster to squeeze out some extra profits with a higher margin for themselves.

Your personal credit card interest rates, mortgage rates, and car loans are tied to that rate…somewhat. Mortgage rates are linked to yields of the bond market, and as the stock market goes up, bonds generally go down (raising the yield), thus mortgage rates go up. Since the Fed likes to stimulate the market, they may actually raise your mortgage rate as a result of their movements. Credit card rates are based on risk factors as well as economic factors, but face it, the card companies aren’t going to give you a break, even if they are getting the money for free – it would just cut into their profits. The harder economic times for banks, as they take huge losses over the subprime lending mess, will lead them to press the consumer even further, ensuring that they milk the viable sources of income for everything they can.