On my way into work this morning, I heard that Ben Bernanke and the Federal Reserve Board cut the target rate for banks’ short-term lending to 3.5%. This makes it more worthwhile for banks to take on more risk with their money, lending it out in cases where they’ve been tight lately. The Fed announced this change between meetings, not at a meeting as normal announcements, in response to the free-fall that the world financial markets seem to be experiencing.
It will be interesting to see how the market reacts today. You could argue that if the U.S. stock market doesn’t drop 5% as it was expected to do today without the emergency rate drop, investors don’t think that this move by the Federal Reserve will help solve the economic problems.
When the Fed rate drops, so do interest rates on savings accounts. A significant drop of three quarters of a percentage point may mean it’s time to rethink saving strategies; if you can’t earn from your savings more than you are paying in interest on debt, then it may be time to forgo extra savings to pay off loans.
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Flexo, have a question for you. Looking for a nice present for my newly born niece. Budget is 200 – 250. Any suggestions? Low minimum mutual fund, treasury bond..etc?
By paying off debt, are you talking about mortgages or consumer debt?
Consumer debt is usually the first target, with higher interest rates in most cases. If you have none, home equity loans and mortgages should be targeted for advance payments as well. When you’re not beating or matching inflation in a savings account, go for the guaranteed “return” of paying off debt. (It’s not really a “return,” it’s just a reduction of expense.)
But would pre-paying the mtg be after funding your 401/Roth or instead of? I know the debate about invest/prepay in a commn market but id this post saying that in this market things have changed? I feel like funding my Roth right now is like throwing money onto a sinking ship.
I am going to have to think long and hard about paying off my school loans now (~25k @ 3.95%) since EmigrantDirect.com will likely lower their rate to near that (and I have nearly enough to fully pay off the loan in savings). Decisions decisions.
As an aside I do not think this is going to help the problem. How is the Fed going to pay for reducing their rate? Print more money, drive up inflation the dollar down. Meh.
Interesting thoughts here. If savings are just sitting in a high-yield account for something longer term (not an emergency fund), inflation-protected bonds will offer a real yield (more than inflation) in exchange for taking on some credit risk. Since these rate cuts almost ensure future inflation you might get some gains in the underlying bonds also. They are especially useful in tax-deferred accounts.
To be honest this move scares me a bit. This was an emergency rate cut, it signals something. Moreover, if we cut rates, will people start buying oil on margin? I think we need to eliminate oil speculation in the US, and then we can mess with rates.
Agreed. This will induce some prepayments for those of us so inclined. But, remember that the real goal here is to make credit cheap so people (and companies) start buying again.
I also wouldn’t mind mortgage rates coming down so I can get out of my ARM before rate reset in 2-1/2 years.
Flexo,
You called it. ING DIRECT just lowered their rate to 3.65%. Hopefully that will be the extent of it this year.
Re-thinking your savings strategy?
Most banks are slashing savings rates.
WTDirect’s Savings Account rate has fallen from 4.90% to 4.30% APY
IngDirect has slashed their Orange Savings rate to 3.65% APY. The rates for the Electric Orange Checking Account have changed as well.
$0-49,999.99 earns a 2.50% APY
$50,000.00-$99,999.99 earns a 4.00% APY
$100,000.00 or more earns a 4.25% APY
Capital One’s High Yield MMA is now poised at 3.50% APY after a series of cuts.