What today’s Fed rate cut means to you (hint: not much)

As expected, the Federal Reserve cut the rate at which it lends money to major banks another half a percent today. That rate is now 1.00 percent, a level not seen since 2003. Although Web ads will doubtless suggest this is fantastic news for borrowers, in reality it isn’t going to offer much relief.

Even in ordinary times, the link between the Fed funds rate and consumer lending isn’t especially strong. And needless to say these are not ordinary times. Credit standards have tightened as banks try to shore up their balance sheets with every dollar they can find.

For example, fixed mortgage rates, despite the numerous Fed rate cuts this year, have actually increased from one year ago, according to HSH Associates. The average 30-year fixed mortgage rate is 6.71 percent, compared to 6.55 percent last year.

Nor are many credit card borrowers likely to see a difference in the interest they pay. Here’s why: Most variable-rate cards are tied to the prime rate, which reliably moves in lockstep with the Fed funds rate. Borrowers usually pay an interest rate equal to prime plus a certain number of percentage points. For example: a 4.50 percent prime rate plus 7.99 percentage points set by the card issuer translates into an annual rate of 12.49 percent. However, many card issuers have instituted “rate floors,” meaning a borrower’s APR won’t fall below a certain level. With a prime rate of 4 percent, many of the rate floor clauses in card agreements will be triggered, leaving cardholders no better off than they were before.—Chris Horymski