The Truth about Lower Interest Rates

Everyone seems to go nuts when the Federal Reserve cuts interest rates.

Looking back a few months, it was perceived as good news. The Dow was up 335 points in September and another 132 points with October's cuts - with Google leading the way, hitting $700 per share for the first time!

At the start of 2008, it was a different story. The Fed announced a surprise three-quarters-of-a-percent cut because of increased fears of a recession and a sell-off in stock markets around the world. That sent the markets reeling, and the Fed said more rate cuts were likely.

They weren't lying. The Fed has now made six cuts in six months, and the market's recent initial response was positive.

So which is it? Here's a little Dolan straight talk on lower interest rates: They are a mixed blessing. That's true with most things in life, but the Fed's decision to cut rates recently has profoundly affected our wallets and pocketbooks.

Let's talk about what this means for you and what you should do about it now.

Fed Funds 101

We'll start by translating some of the technical speak jargon you may hear. When the Fed cuts rates, they are technically cutting the federal funds rate, which is an overnight lending rate that banks charge each other. That rate is important because it influences the amount of interest we consumers pay for various types of debt, such as credit cards, home equity lines of credit, mortgages, student loans and auto loans - all of which we'll talk about in a moment.

By lowering the interest rates, the Fed is attempting to lessen the impact of the current mortgage meltdown because an estimated two million homeowners face sharply higher mortgage payments when their Adjustable Rate Mortgages (ARMs) re-set to higher payments in the near future.

The Fed, in effect, is trying to prevent a flood of foreclosures across the U.S. by lowering interest rates on mortgages. The hope is that folks whose rates are adjusting higher can refinance at a lower rate.

However, one of the problems with this strategy is that some borrowers who got mortgages during the "easy money" times of mortgage lending (when all of those sub-prime loans were issued), may not qualify to refinance their mortgages because credit standards have been tightened. (Daria thinks the Fed is, well, stupid, and she's not shy about saying so! See Washington Insights: The Madness Behind the Method for her, shall we say, spirited take on this!)

Bringing Washington to You

Now you know why the Fed is cutting rates, so let's look at how these much ballyhooed decisions directly affect us: