Fed Rate Cut: Affect On Mortgages and Savings Accounts?

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I’m sure you’ve heard by now, Bernanke and Friends cut the Fed Funds rate by 50 basis points to 4.75%. It was the first rate reduction in 4 years, which then spawned the biggest one-day gain in the Dow in about the same time. It seems like everyone has an opinion on the Fed rate cut. Some said it was needed to curb the hysteria and possible recession, while others thought it was just a bail-out for people who took unreasonable risks and now don’t have to pay the price. Personally, I think it’s just trying to delay the inevitable, but I’m no economist. I always try to keep a long-term view on the stock market, so I’m not that concerned there. So how else will this affect things?

Savings Account Rate Drops?
Capital One 360 has already dropped their savings rate from 0.80% to 0.75% APY as of today (plus their checking tiers as well), and I expect some other high-yield savings accounts to follow. I think one hope we have is that banks may want to stay at 5.0% for psychological reasons. If you want to lock in some 6-month or 1-year certificates of deposit, I wouldn’t wait too long to do so. Anybody notice any other drops?

Mortgage Rate Drops?
Personally, I’m hoping that this rate drop doesn’t work, and the the housing market continues to weaken. That way, I can still get a low mortgage rate with our excellent credit, and a house at more reasonable prices! But I wonder if significantly lower mortgage rates will actually occur…

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  1. EmigrantDirect dropped their CD rate from 5.10% to 4.55%!! That’s over half a point drop. Insanity. I’m hoping the bottom doesn’t fall out of their plain vanilla online savings account.

  2. I will say this again as I have said this before to Americans–yesterday’s decision by the Federal Reserve has to be one of the most foolish decisions for the American economy in the long-run. This is nothing to cheer about or as Americans do – get all “excited about.”
    This is like giving an ibuprofen shot to cure a major long-term problem. I do not understand is why the Federal Reserve is worried about as to what is happening in the stock market. This is not it’s job.

    This is a complete shame. This American-trained economist added coal to the fire on this train-wreck.

    If you look at my previous posting, I had warned people about this sub-prime mortgage mess. As one reader said the world is not going to come to an end. True, it is not for the rest of the world, but it is definitely tumbling for most Americans. You all need to live outside this bubble of America as the great superpower and nothing can happen to it.

  3. Ted Valentine says

    LOL Matt, I’m guessing you had no money circa 2002-03, correct? FYI, money market accounts and savings account rates paid Correction -> Fed Rate Cuts -> Cheap money -> Dumb borrowing practices -> Insane home inflation -> Repeat dumb borrowing -> Time to pay the piper.

    And now were going right back down the same road. There is no free lunch. You have to pay eventually.

  4. Ted Valentine says

    I don’t know what happened to my post. It got messed up. I think its an HTML issue.

    It was supposed to say that MM rates paid less than 1% back then.

    Then it was supposed to say doing the same thing that caused this mess in the first place.

    Tech Bubble -> Correction -> Fed Rate Cuts -> Cheap money -> Dumb borrowing practices -> Insane home inflation -> Repeat dumb borrowing -> Time to pay the piper.

  5. Yeah definitely no money back then but I remember the bubble bursting. And everything’s relative, friend — dropping half a point overnight, to me, is pretty dramatic. If it drops back down to >1% I’m glad I moved my money into CDs last week.

    Also, as far as your post messing up, looks like you bumped your mouse, highlighted text then deleted it.

  6. I do agree that this was an attempt to calm things down….but the biggest problem you have today is predatory lending. Real wages haven’t risen much, yet people who could only qualify for a 200k loan in 1999 go and build a 450k house now cause they figured they could afford the monthly payment. Then people go buy a house that was 35% cheaper two years ago think they got a deal. They must’ve not thought about increasing taxes and the dramatic increase in energy costs. I’m betting that hurts them with the monthly payment!

    Would this have an effect on the interest rates for student loans? I need to refinance in the next 6 months and I was hoping I could get a half % reduction.

  7. I do think that in theory, the Fed should not have cut rates (at least not by as much as they did) becuase the housing market should continue to fall. There was a bubble, and it needs to slowly deflate.

    However, this cut was not a bad decision on Ben B’s part, in my opinion. Market mania and widespread loss of investor confidence are things much more concerning than inflation right now–and it IS the fed’s job not only to moderate inflation but also to ensure continued economic growth. Ben B is an expert in the Great Depression and also remembers (like many others) the awfully painful deflationatory environment in the 80’s. A repeat of either of those things would be way worse than bouying housing prices and easing the average investor’s credit card, student loan, and home-related loan interest rates.

    Plus I can’t really complain because my net worth certainly increased with the market rally!!

  8. Ultimately time will tell. I was hoping the rate cut was only goint 25 basis points, but maybe the Fed knows more than I do. I think if we compltely avoid a recession then the Fed will have cut rates too much. If we do hit a recession then I think the fed did the right thing to soften the blow. I don’t think housing is going to come back for a while. The glut of inventory will keep that from happening, and even with the the overall lower rates, the credit spread between borrowers should continue to be elevated. I don’t think Moody or S&P are going to be calling subprime backed debt triple A quality any more. Ultimately it was financial players subsidizing bad borrowers…

  9. I got a one year CD from ING yesterday for 5.15%,think CD rates will drop to about 3.75% over the next 6-9 months.

  10. While I agree that the rate cut is a thinly veiled bail-out for those facing dire troubles, and I’m extremely bitter about people not facing the consequences for their own bad decisions, at the same time I realize that we–none of us–want a nation where our banks are failing and a sizeable portion of homeowners are facing catastrophic foreclosure rates.

    If the gov’t can do something to keep homeowners paying their bills instead of defaulting, declaring bankruptcy, and possibly going on public assistance, you can’t blame them for trying.

  11. I see housing prices and interest rates continuing their fall. I feel like we’re going to experience a mini-Japan deflationary housing market, but not to the same extreme. I see prices dropping another 5-10% and mortgage rates to stay the same or even fall another 1/2 point in the next two years.

    Of course, given my track record on “timing the market” (I buy high and sell low — great system ;>), my predictions may be completely off. But I’m also going to be in the market for a new house in about 2 years, so I hope I’m right.

  12. I find it very interesting CD rates dropping. Banks are hurting for money right now, for them to drop saving and CD rates doesn’t make sense. If a bank is offering a really good CD rate, that means their
    mortgage rate isn’t great, they can’t offer competive rates on both side of the business, otherwise, banks can’t make money.

  13. HSBC on-line savings still has a rather high yield at 5.05%. It started out as 6.0% though, didn’t it?

  14. Hi,
    I am too new to this concept. I want to know what a rate cut means and how it effects us, the economy, tec. Basically, what does a rate cut mean? Can somebody please point me to a good resource like “Fed Rates Explained”. Thanks for your help!

  15. Major indexes posting 3%+ in 2 days.

    Nothing wrong with that.

  16. THANK YOU, Jonathan!!!

    Folks, I hammered Jonathan for the last week about this one!! I could just TELL we were in for it!!

    Anyway………….yes…………this is about the most foolish thing that BerWANKER & Co. could’ve done.

    Notice how suddenly Greenspan’s opinion was in EVERY article you read over the last month????? It was inevitable!!


    Baby boomers are desperate for a comfortable retirment & the current administration as well as the Fed are going to do EVERYTHING and ANYTHING to make sure that happens.

    I am soooooooooo disappointed in Bernanke right now I could just SPIT!!!!!!



    Ain’t this country great at putting bandaids on its problems???


  17. I have to apologize for my father – how you say- his English little bad. We want to live in superpower too!

  18. Did wamu’s 5% online savings drop?

  19. Mortgage rates are tied to long bond yields (10-year) which are set in the open market, and not by the fed funds rate. In fact, even though the fed reduced the benchmark rate to 4.75, the 10- and 30-year treasury yields actually increased.

    Mortgage rates have actually been pretty consistent for many years now, despite changes to fed interest rates. When Greenspan raised rates up to 5.25%, mortgage rates did not increase in concert. So why would we expect them to decrease when they lower the rates? In fact, if the dollar continues to decline, it would be expected that long bond yields would continue to increase.

    It will certainly help financials, though, since they can borrow more cheaply. CD and Savings account rates will fall, as will as anything tied to the prime rate.

    But, in the end, this is 100% a bail-out for financials at the cost of savers and the US dollar. Stock gains… who knows if they will hold up? I expect more of this to continue via many gov’t attempts at new regulations, expanded roles for Fannie and Freddie, etc…

    But on the bright side Ben, your 1oz gold bars that you got have become even more valuable! Oil at $82 and gold at $730 is a fun little side effect of this (and likely future) rate cuts.

  20. dong said
    but maybe the Fed knows more than I do

    sadly, that might not be true

  21. Jonathan,

    After all these years reading your blog, why are we still talking about savings accounts?? I took your advice some time ago and stashed a wad of money in ing and citi’s super money market. But since then, I’ve grown up and learned that the stock market is where the real money can be made. In the past three months, I’ve made an average return of 20%. That’s three months I repeat. The 5% in the savings accounts would have meant I had to stash the money for 12 months.

    Your blog is one of the best. Your loyal readers have stuck around for the ride. Don’t let us outgrow you. Let’s move on from the savings accounts already.

  22. Cinnamon J. Scudworth says

    It’s interesting to me that this is happening just as I have decided to simplify my finances by moving all of my cash savings from separate savings accounts at ING and Emigrant to a single money market fund at Vanguard, where I also hold my Roth IRA. I expect that in a declining interest rate environment, the money market fund will eventually post lower yields than the online banks. But I think the consolidation and convenience will be worth it to me. Plus, there is a certain satisfaction in knowing that my cash will be earning the “market rate,” and not what the banks have decided is profitable.

  23. Funny, I just opened an Ultimate Savings Account at Citibank website just yesterday.

    It is still 4.75% though.

  24. Just curious–why not open their Ultimate Money Market–it’s paying 5.1%. Is it a convenience thing?

  25. MP – Do you have any idea that you can lose all your money in the stock market with one bad news item? I hope you are investing for the long term so volatility evens out. IIRC, Jonathan is shopping for a house. He needs liquidity. Who is to say your stock will be at a profitable price the day you go to sell it? If you have a crystal ball, I’d love to peek at it.

    You may have moved beyond high-yield savings account, but they do have a place in a person’s financial planning strategy. It sounds like your goals are different and that you are more risk-tolerant than some other people. Personally, I peeped Paypal’s money market rate today and it’s 5.05%. Even though it’s not FDIC insured, I think that it might be a good place for me to dump some cash (Less than $500) instead of ING for the moment. (At least until the rate falls there too. I could afford to lose $200-300 in an uninsured account should Paypal go under, but risking any more than that would suck.)

  26. “# Jim Says:
    September 19th, 2007 at 8:22 pm

    Just curious?why not open their Ultimate Money Market?it?s paying 5.1%. Is it a convenience thing?”

    Well jim, it is mostly for convenience. I don’t feel like doing the online bill pay stuff twice a month since I really don’t have any bills coming in. It really isn’t that much of a difference with the money I have in my savings account. I don’t have much, only ~$1200 currently, but I just started putting my paychecks in there a month ago.

    If anything, I saw the deal BoA has with their savings account 5.33%. Catch is I need at least $2500 to make it worthwhile.

  27. MP – I’ll be writing more about investing as I go along, but if you’re looking for stock picking tips, this ain’t going to be the blog for you. History suggests that the odds are against you in that area. But if you want to hear more about index funds and asset allocation, stick around. 🙂

  28. E-Loan Savings is down to 5% from 5.25% as well.

  29. Amen to Jonathan’s MP comments.

    20% in 3 months = time to pay the piper VERY soon 😉 (Stock up on toilet paper, son).

    Emigrant still showin’ 5.05% & I’ll be VERY interested to see if they hold it there for psych reasons…….(at least until the next Fed meeting, then all bets are off)………& most DEFINITELY where FNBO’s gonna go w/ their rates.

    Cash is still king……………(It just may be in “EUROS ONLY” soon).

    Grrrrrrrrrrrrr!!!!!!!!! 😐

  30. Hi there,

    Fed interest would go down eventually.

    I just look at E trade, it offers 1 yr CD at 5.25, at least 1K up, FDIC insured. I got myself a CD.

    Cash is the King.

  31. I am also very interested in where rates will be heading, particularly FNBO after the 6.0% apy rate is over. Umbrella Bank was offering a 6.0% apy intro teaser rate that I was planning to take advantage of, however that has now decreased to only a 5.35% apy intro teaser rate.

  32. Just thought I’d add… Emigrant Direct’s MyWay CD (6 month to 10 years) dropped its rate to 4.55% apy even with the savings account apy still at 5.05%…

  33. GMAC dropped their MM to 4.9%.

  34. Cinnamon J. Scudworth says

    Phillip – re: Emigrant’s savings account still at 5.05%

    It seems to be (subjectively) that ING, Emigrant, and HSBC are the “big three” best-known online banks. It wouldn’t surprise me if Emigrant would try to keep their rate steady until the end of the month to try to sop up deposits being taken out of ING.

  35. I just borrowed a ton of money from Chase with their 12 months 0% interest hoping to make some free money… now is not the time to start lowering those rates. But I guess they’re not reading this blog 😉

    Question for all those smart people out there and especially Jonothan… I must have about 90-100 thousand in credit card credit lines with the 13 cards I now have open… so when I borrowed 60,000 a few weeks back to park it in a savings for 5.35% for a few thousand free dolars over the year… my credit droped from 750 to 690! I never had such a low score before… what did I do wrong and or did I do wrong? What percentage is safe to borrow against? Thanks in advance.

  36. Amtrust Direct is still at 5.31 APY. I will probably go there after FNBO.

  37. Amtrust Direct just dropped to 5.21 APY.

  38. Let’s see, fed drops rates, making the dollar less attractive, making treasuries less attractive, causing mortgage rates, which are tied to treasuries, to actually go up. Yet these same banks are using the fed cut to justify dropping savings yields and adding BT fees to their credit card offers. Sounds like somebody’s margins are improving. Maybe we should be investing in the stocks of these banks instead of putting it in their accounts.

  39. @ Andy:

    I must have about 90-100 thousand in credit card credit lines….I borrowed 60,000…to park it in a savings for 5.35% for a few thousand free dolars over the year? my credit droped from 750 to 690!….what did I do wrong and or did I do wrong? What percentage is safe to borrow against?

    The amount you borrow from your credit cards is a major factor in your credit score. To be regarded by credit-reporting agencies as someone with responsible fiscal management skills, try to use up no more than 30% of your available credit — they have no idea whether you’re using the borrowed money for savings or for a high-rollin’ Vegas holiday. link

  40. BofA account dropped big time too.

    Andy – 690 ain’t that bad, first of all, depends on what you need the great credit score for. Otherwise, credit score is all about utilization ratios, both on your total used/total limit, and on a per-card basis. People say that the “magic” numbers are 30%, 50%, and 90%. For example, if you use less than 90% of all your individual limits, your score will be better than 95-100%, and so on.

    Mike – Financial companies are already a huge part of the S&P 500. So if you have such an index fund, you’re already joining in the party. Didn’t you see that upwards spike this week? 🙂

  41. Two things….

    Jonathan, one of the reasons I like your blog is that you don’t have stock picks. I think you’re advice is down-to-earth and unbiased. You cover simple and sometime unusual personal finance topics that I think about all the time. I feel like when people start touting a bunch of random stocks there are too many vested interested to know if the advice is legitimate or not. You may provide some great technical analysis or valuation explanation about GS and then get post relating to some worthless penny stock by people trying to push trash. I’m glad your blog is free of that.

    Second, I wonder when ING or another bank drops 30bps after the fed drops 50bps is this just some indication of their willingness to incur interest expense? I noticed that BofA dropped by more than the fed, on some products, thoughts?

  42. As of now, Everbank has a 3 month teaser at 6.01% (min $1500 to avoid fees. not sure if there is a fee to close the account after 3 months)

  43. Jonathan, I also thing that your blog is useful because it focuses on unique financial strategies as well as good common sense. Stock advice can be found anywhere, and I agree with Ptam that analysts can be biased.

    MP, I find the savings acct info useful for 0% Balance Transfer abritrage. I wouldn’t dare stick borrowed money into stock, although I completely agree with both you and Jonathan that stock is the way to go for long term investment.

  44. I really don’t appreciate my dollar going down the drain 🙁

  45. MobileDeveloper says

    Message from FNBO:

    Beginning September 29, 2007, FNBO Direct is happy to announce that we are offering one of the highest rates in the nation:

    5.05% APY*

  46. Message from HSBC Direct:

    “We are writing to let you know HSBC Direct has adjusted your Online Savings Account interest rate to 4.50% APY*.”

  47. Just got on the igobanking website, and their rate has dropped to 5.17% APY, down from 5.30%, as of today.

  48. Emigrant direct is down to 4.75% now. Damn!

  49. Hey I’ve been reading through a lot of these posts with great interest as my eloan account has been dropping to 4.75 as of today. I’m new to saving/investing but over the last year I’ve put away about 30K and I’m not for sure what to do with it. My wife and I will be going having our first child next year so I’ll be going from two incomes to one and am hoping to have almost 60K saved by the due date. I should be able to maintain the bills/mortgage fine on my salary but I’ll have this nest egg saved up but not for sure what to do with it. Is living it in a savings kind of a waste? I see a lot of people say they are moving beyond savings and getting into the stock market… I have 40K in a 401K plan, as does my wife and we are under 30. I think maybe I’ll start maxing a Roth IRA but is a mutual fund or some other stock market venture worth the risk? Any suggestions? Also do you all constantly move your money to different online banks based on who is the highest rate? I’ve seen several higher now but I don’t think they’ll probably stay the .25% higher for much longer and I like eloan so should I just stick it out there for now and see what happens?

  50. Instead of a savings, why don’t you put your money in a CD? Most banks offer higher CD rates and the rates are locked in, unlike savings which tend to drop.

    I just did a google search on high CD rates, and came across a Millenium bank which offers CD rates as high as 6.5% for a one year term. Has anyone had experience with this bank? I have never heard of it until now.

    I have only recently got into stocks. I put in about $5,000 and have only gained $100 in one month. I hear a lot of adverts on how much money people make on stocks so fast, but it seems like a pretty slow process, like everything else.

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