Fed interest-rate cuts

In a gloomy market, where the headlines have been dominated by crisis and interest-rate cuts, a lot of consumers have figured that they would at least get some payback when the rate cuts hit home.

For that to happen, however, consumers are going to have to work for it and make some moves that they might not have been expecting.

But what the rate situation is making plain is that for any consumer carrying debt and nervous about the stock market and inflation the best way to increase net worth is likely to come from refinancing and paying off debt.

That said, it won't be mortgages that lead the way in refinancing. Mortgage rates tend to be tied more to Treasury yields than to the short-term rates that the Federal Reserve is cutting, so while consumers may expect a Fed cut to help them out at home, there's no guarantee.

In general, long-term rates like mortgages move in sync with short-term rates because the cuts are being made in order to help a slowing economy; what makes today's situation different is that the cuts are being made to stem a financial crisis that occurred without a recession. Lacking that downward stimulus, longer-term rates have not followed the short-term made-to-bail-out-the-market-now trend.

The only plus for consumers is that rates on adjustable-rate mortgages have dropped, so that the mortgage resets that were expected to crush consumers -- as debts they took on a few years back were repriced to much higher levels -- have actually not been such a big burden. In some cases, the reset rate has actually been better than the introductory rate.

"This has helped people who got into trouble with ARMs," says Greg McBride, senior financial analyst for BankRate.com, "but for almost every other consumer, this news hasn't been so good."

The one sure outcome of a Fed rate cut is that savings rates are going down. For savers, that has dropped rates on certificates of deposit and money-market accounts back towards the record lows they didn't expect to see for awhile. The average one-year CD is now paying 2.89%, down from just over 3% a week ago and likely to fall further before stabilizing.

"Savers are watching two things happen right before their eyes," McBride says. "First, they are seeing savings rates go back to levels where they have to wonder if it's worth it, and they are watching each rate cut fuel inflation, which makes it harder for their savings to keep pace with inflation."

In fact, most savings vehicles currently lag inflation, meaning that the nervous investor who wants to find a safe haven to avoid principle risk in the stock market is, in fact, embracing purchasing-power risk -- the chance that their money will lag inflation -- if they move money into savings vehicles.