For many Americans, the effects of the Federal Reserve’s aggressive rate cut will be swift and striking. The average borrower could save hundreds of dollars within a few months — and the average saver could lose just as much.
Fortunately, as far as the strength of the consumer-driven economy is concerned, there are fewer people relying on the income earned by their investments than there are people heavily in debt. With $2.5 trillion in consumer debt outstanding — and trillions more in home equity lines of credit and adjustable-rate mortgages — a cut of the magnitude made Tuesday can translate into billions of dollars in spending power according to the Los Angeles Times.
“It’s bad for seniors who are living on fixed incomes, but this gigantic baby boom generation is largely made up of borrowers,” said Gary Schlossberg, senior economist with Wells Fargo Capital Markets in San Francisco.
Wendy and Nicholas Stanton, who work in the entertainment industry, are among the borrowers, with an $83,000 equity line of credit secured by their house in Pasadena.
If the rate on their credit line drops by the same amount the Fed cut its key short-term rate — three-quarters of a point — it will shave $50 or so off the line’s monthly payment.
The Stantons say they’ll spend that money, which is what the central bank wants them to do.
“The way our industry and the housing market are at this moment in time, even a $5 payment cut is significant to us,” said Wendy Stanton, an art director out of work because of the writers strike.
The nation’s 75 million homeowners are likely to feel the most significant and immediate benefits. Home equity lines of credit are often tied to the prime rate and other short-term indexes that fall in lock step when the Federal Reserve cuts its benchmark rate.
Read it here: Rate Cut: Good for Borrowers, Bad for Savers