Q&A: How will the Fed's rate cut trickle down to consumers?

Sonoma County consumers are likely to see lower costs on adjustable-rate mortgages and other loans, with businesses also benefitting, following Tuesday's Federal Reserve rate cut.

But they will continue paying a premium in what remains a risky lending environment, local bankers said Tuesday.

The effect of the reduction, which is aimed at boosting consumer spending and business investment, remains unclear because the economy has continued to weaken despite previous Fed cuts.

"Does the Fed have enough ammunition to stimulate the economy? That's still a huge question mark," said Greg Jahn, chief investment officer for Exchange Bank. "There's a fair amount of lag between when the Fed does these things and when the actual economic results show. It typically takes nine months for a Fed cut to filter into the economy."

Here are answers to key questions on how the 0.75 percent drop in the prime rate will affect consumers and businesses:

Does the rate cut mean lower costs for businesses borrowing for cash flow or financing inventory and equipment?

"This stimulates liquidity for borrowers because a loan becomes more affordable," said Steve Stapp, chief financial officer for Redwood Credit Union. "When prime adjusts downward, their loan payments will adjust downwards. It is a significant savings."

Will the cut lower mortgage rates?

Fixed- and adjustable-rate mortgages are not tied to the federal funds rate. Fixed-rate mortgages have moved up the past month as lenders must pay investors higher returns for mortgage-backed securities because they are considered more risky with foreclosures on the rise, Jahn said.

Adjustable-rate mortgages often are tied to short-term treasury rates, and those have more closely tracked the federal funds rate.

"Those have declined significantly. That's a direct benefit. Someone who took out a loan that's going to reset next month is definitely going to feel the benefit," Jahn said.

What happens to home equity lines of credit, which homeowners tap for a variety of spending?

Home equity lines are tied to the prime rate. The 3 percent cut over the past year means a $750 annual savings for a homeowner who has taken out $100,000 in equity, Stapp said.

"Now there is more of an incentive to take out one of these loans for those who do have equity," he said. "It lowers your payment by $62 a month. That's a tank of gas or it gets you to the restaurant once a month."

What is the effect of the rate cut on auto loans?

Auto loans are fixed-rate loans and not tied to the prime, but costs for those and other fixed loans should ease with the overall boost to lending, Stapp said.

"Once there are more funds into the overall banking system, generally you see fixed rates start to come down," he said. "There's more willingness by institutions to lend. Car sales have been down, so it's really an effort to stimulate buying by the consumers."

What happens with credit cards?

Variable-rate credit cards are indexed to the prime rate, and that means some savings.

"Rates should be gradually moving down because they usually move in the same range as prime. Credit card debt should also follow, but that decline may not follow as closely as it has in the past because there's been this reawakening to credit risk," Jahn said.

What do rates mean to people who invest in certificates of deposit, money markets, and other savings?

"All deposit products come down. We're seeing certificate rates in more than the 3-4 percent range. A year ago they were in the 4-5 percent range," Stapp said. "I would hope people still save. There is a lower return on savings. But borrowing becomes cheaper also."

You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.