Can the Fed rate cut benefit borrowers?

The Federal Reserve made a substantial cut in a key interest rate Tuesday, March 18.

The federal funds rate was lowered three-quarters of one percent, referred to as "75 basis points," from an already-low 3 percent to just 2.25 percent.

The rate cut may be good news for borrowers, even though the Fed’s decision doesn’t directly reduce interest rates on consumer or home loans. Instead, the rate cut can influence short-term interest rates on home equity lines of credit, adjustable-rate mortgages tied to the prime rate, car loans and credit cards. Longer-term loans like 30-year fixed-rate mortgages are less likely to benefit from the Fed’s rate cut.

The Fed decided to cut the interest rate due to slower growth in the economy and consumer spending, softer job markets and "considerable stress" in the financial markets. The lower rate should "promote moderate growth over time" and "mitigate the risks to economic activity," the Fed said in a statement.

"The tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the Fed observed.

Inflation is also a concern. Price increases are expected to "moderate" this year, but the outlook for inflation has become more uncertain and will need to be carefully monitored, the Fed said.

Even before the latest rate cut, interest rates were already very affordable on many types of loans, especially compared with historical averages. But a lower interest rate shouldn’t be the only factor you should consider if you want to buy a home or refinance your current mortgage. Shop around and compare refinance interest rates, monthly payment, fees and other terms of various loans that are offered to you. Choose a loan that you can afford and that fits your own personal financial situation.

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