If you're banking on an interest rate cut fairly soon -- and you should -- it's time to consider what moves to make with your money.
Do you lock up a CD now? Wait around to refinance? Drag your feet on a car loan?
The Federal Reserve board meets Tuesday, and we'll likely see the first rate cut in four years.
Diane Swonk, chief economist for Mesirow Financial in Chicago, expects the Fed to cut the short-term federal funds rate to 5% from 5.25% next week. The federal funds rate is the rate banks charge each other for overnight loans.
Swonk is also predicting that the Fed would cut rates by a quarter percentage point again at its Oct. 30-31 meetings.
The reasons to make a move: Housing stinks, the U.S. economy is hurting and the jobs picture is getting bleaker.
"There's absolutely no reason in my view why they wouldn't ease at this point," said Mark Zandi, chief economist at Moody's Economy.com.
Zandi is forecasting at least two rate cuts this year, starting next week.
But if the Fed drops rates, consumers would get a break, too. The prime rate -- a rate that influences credit cards, home equity lines of credit and other loans -- would drop to 8% from 8.25% by next week, if the Fed cuts rates by 25 basis points. If we get a second similar cut in October, too, the prime would drop again to 7.75%.
"There is a light at the end of the tunnel -- and it's not a train," Swonk said.
Bad for CDs
A round of rate cuts should make investors and lenders less skittish -- and help the U.S. economy regain its footing.
As the Fed starts cutting rates now, the downside is that savers would make less money on deposits.
"The outlook for the Fed cutting interest rates does not bode well for CD rates in the coming months," said Greg McBride, senior financial analyst for Bankrate.com.
The national average yield for a one-year CD was 3.75% last week compared with 3.78% in January and 3.89% a year ago.
Given that the rates are likely to move lower, McBride advises that savers might want to lock in some higher CD rates for one year or longer.
Some banks, such as LaSalle Bank, have CD specials for less than a year. LaSalle has a seven-month CD that has a yield of 4.65% for a minimum deposit of $2,000. The yield goes up to 5% if the saver has a minimum of $15,000 to put into the CD. It has to be new money to the bank.
A waiting game
As for buying a home? Refinancing? Or borrowing to buy a car?
Playing the rate game could be trickier.
Overall, Zandi notes that consumers would likely get better deals by waiting to borrow money. If you're shopping for a home, Zandi said it could pay to be patient and wait until rates and home prices fall further.
If you've got an adjustable-rate mortgage, it might seem logical to wait to refinance until rates fall a bit more from here.
If you have an ARM that will reset and climb higher in the months ahead, you'd take on more risk by waiting.
Will home prices fall even further in the next few months, making it harder to refinance? Will you be out of a job in six months or so -- again making it far harder to refinance? Will the mortgage reset and then make it harder for you to pay your bills on time? And will your credit score drop?
"It's a gamble, and I'm not sure it's a gamble that's going to pay off," McBride said. "If you start falling behind on the payments, the lenders are going to run the other way."
So talk to the bank as early as possible anyway.
As for car loans?
The auto industry overall would benefit from any kind of rate cut. Lower rates, after all, make it easier for car companies to offer financing deals -- and move product.
In general, though, interest rates on car loans aren't likely to fall much with the first few rate cuts.
On a $25,000 car loan, for example, a quarter-point cut would produce a savings of about $3 a month, McBride said.
Instead of waiting, he said, consumers who want a car soon would be better off shopping for a good rate, a good deal -- and cleaning up the car for a better trade-in price or used car sale.
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