The latest round of interest rate cuts initiated by the Federal Reserve apparently will have more impact on rates paid to savers than it will on consumers' borrowing costs.
Banks have been quick to lower the rates they pay savers on certificates of deposit, passbook savings and money market accounts as the Fed has notched down the discount rate -- the interest the Fed charges member banks for loans -- four times this year.
But they have been slower to cut the rates they charge consumers for personal and car loans and on credit cards, although there is some evidence that consumers are beginning to resist high-rate plastic.
According to Hugo Ottolenghi of Bank Rate Monitor, a weekly newsletter that tracks bank rates, banks cut rates paid to savers on Wednesday, the same day the Fed cut the discount rate a half-percent to 4.5 percent and the prime fell to 7.5 percent.
Bank Rate Monitor's survey Wednesday found that banks trimmed the one-year CD rate by 11 basis points, or eleven-hundredths of a point, to 5.22 percent, while the six-month CD rate fell 9 basis points, to 4.99 percent.
"That's the first time since deregulation that it's been under 5 percent," Ottolenghi says.
The latest declines represent a 26 percent drop in one-year CDs since the first of the year, when the average was 7.09 percent, and 29 percent for the six-month CD, which has plunged from 7.03 percent. The 2 1/2 -year CD has fallen about 23 percent, from 7.44 to 5.70 percent.
Money market accounts have dropped from 5.74 percent to 4.76, a decline of about 17 percent.
Consumer loan rates, meanwhile, have fallen just a fraction of the amount the savings rates have.
New car loans have shown the most movement, from 12.29 percent at the beginning of the year to 11.18 percent as of Tuesday, a drop of about 9 percent, Ottolenghi says.
Unsecured personal loans have fallen less than 3 percent, from 17.40 to 16.90. And credit card rates have barely budged, from 18.86 to 18.78 percent over the same period.
"Savings rates are falling much faster than consumer loan rates," Ottolenghi says.
He says there was no question that banks were using the profits gained from the spread between savings rates and consumer loan rates to shore up losses in other parts of their portfolios, such as commercial real estate.
Sharing that view is Robert McKinley of RAM Research, a Frederick credit card tracking service, who says big banks looked on high-rate cards as a golden goose. Even with rising delinquency rates, he says, most remain quite profitable.
This week's cut in the discount and prime rates, he says, would increase criticism of the wide spread between the banks' cost of money and credit card rates but would do little to lower the national average of bank card rates.
That's because, although there are more bargain cards available this year than last, the top 10 issuers, which control 51 percent of the market, charge an average of 19.28 percent.
But McKinley says there are signs that consumers are beginning to resist the high rates. A significant development came yesterday, he says, when Banc One Corp. of Ohio, the 11th largest issuer, unveiled a low-rate 13.9 percent Visa or MasterCard with a $25 annual fee and a 25-day grace period.
"I think we're going to see more big issuers coming out with deals like these," he says.
A midyear RAM Research survey showed high-rate issuers losing more card holders than they could replace, he says. Simultaneously, bargain rate issuers have shown large growth.
For instance, USAA Federal Savings of Tulsa, Okla., which offers a 13.75 percent no-fee card, has seen its credit cards jump 64 percent in 18 months.
"It appears to be the beginning of a trend," McKinley says. "Consumers may finally be waking up. Before, they were always more concerned with the annual fee than the interest rate."
John Bowers, executive director of the Maryland Bankers Association, says that, while the prime rate closely reflects Fed actions, consumer loan rates lag behind. But he says he expects auto and personal loan rates to decline.
Bowers also points out that many consumers now use home equity loans to finance big-ticket items because interest paid on them is still deductible in federal income tax returns.
"Many traditional loans are being lumped into home equity loans. And a lot -- I'd say a majority -- of these are pegged to the prime. So there's an immediate impact," he says. "They are the hottest sector of consumer loan growth."
But Bowers also acknowledges that lower savings rates are squeezing those dependent on interest income.
"The real question is, as interest rates have dropped on the deposit side, a fairly wide range of those dependent on fixed income are feeling the pinch," he says. The result is that they curtail spending.
The lower savings rates, he acknowledges, have prompted some to shift their money.
"There has been some flight out," he says, adding that for many, however, the safety of CDs is important.
Steve Norwitz, spokesman for T. Rowe Price, says there has been a "tremendous" inflow of money from investors looking for higher returns, mostly into short- and intermediate-term high-grade bond funds and Ginnie Mae funds.