A SECOND INTEREST-RATE CUT

by the Fed bringing the fed funds rate to 4.50% was welcome news for investors. At the close of trading Wednesday, the Dow Jones Industrial Average was up 138 points to 13,930, a 1% gain.

Should consumers also be joining in the revelry? That depends. A drop in rates can ease the pain of certain loans but it can also reduce your savings rates. Here's how a rate cut affects your bottom line:

Mortgages

Mortgage rates have drifted downward since the Fed's first rate cut in September. But that has less to do with the Fed's move than with disappointing economic news, says Keith Gumbinger, vice president of mortgage-tracker HSH Associates.

Fixed-rate mortgages are pegged to the 10-year Treasury, and thus are largely dependent on long-term economic expectations, rather than short-term interest rates such as the fed funds rate. Case in point: Since the Fed's September cut, rates on 30-year fixed loans have largely been flat, hovering between 6.4% and 6.46%. As bleak economic news hit last week namely, continued housing turmoil and concerns that it may spread to other economic sectors, as well as oil prices at $90-plus a barrel mortgage rates slid to 6.29% as of week's end, according to HSH Associates. (The 10-year Treasury was relatively stable in the first four weeks after the cut, bouncing between 4.6% and 4.7%, but has since dropped to 4.38%.)

Adjustable-rate mortgages, or ARMs, still remain nearly as high as fixed-rate mortgages. Since the Fed's September cut, the average 5/1 ARM (a mortgage that holds a set interest rate for the first five years and adjusts annually thereafter) has slid from 6.61% to 6.22%. What does that mean for homeowners about to see their rates reset? If your mortgage rate is tied to the 1-year Treasury (that's typically the case for ARMs that reset annually after their fixed-rate period expires, such as 3/1, 5/1 and 7/1 ARMs), the Fed's rate cuts will bring some relief, Gumbinger says. A borrower with a 5/1 ARM who five years ago started with a 5.3% loan, for example, will likely see a reset to 6.75% this year. Before the Fed's moves in September and today, that adjustment might have been to 7.5% or more.

Whether subprime borrowers will see relief depends on the benchmark that determines their mortgage rate. Most of the ARMs sold to this crowd (so-called "option ARMs," which reset more rapidly than other ARMs) are pegged to the LIBOR, or London Interbank Offered Rate, which is the rate at which banks lend money to one another in the London markets. The Fed has some, but not direct, effect on LIBOR, particularly as it remains high thanks to the credit crisis's effect on overseas banks. Loans pegged to U.S. Treasurys for example, the MTA, or Moving Treasury Average index will see some, albeit modest, drop after today's cut.

Meanwhile, if you're in the market for a new loan and don't have pristine credit, don't expect today's cut to help you get a loan more easily. "It's very hard to find option-style ARMs that don't require you to have super-human credit, and it's very hard to find 100% financing or piggy-back loans," Gumbinger says. "There's just nobody who wants to buy that paper and that will continue to be a problem for some time now."

Home-Equity Loans and Lines of Credit

Folks who have a home equity line of credit, or HELOC, have already seen savings as a result of the first Fed cut and will see more savings with their next statement, says Gumbinger. HELOCs are pegged to the prime rate, which moves in lockstep with the fed funds rate, and have the most direct relationship to the Federal Reserve's recent rate drop.

Home equity loans, on the other hand, carry fixed rates. That means homeowners who currently have such loans won't see a change in their payments. Future home-equity-loan borrowers, however, may see a slight drop in interest rates if banks start lowering the rates offered on savings, money-market accounts and certificates of deposit. That's because home-equity loans are typically financed by the lender's own deposits, Gumbinger explains. This also means that loan rates could vary by region, depending on the strength of the local economy and housing markets.

Credit Cards

Consumers who have variable-rate credit cards saw some immediate relief after the Fed's rate cut in September and will likely see some more after today. That's because their interest rates are pegged to the prime rate. But don't expect a windfall, says Greg McBride, senior financial analyst with Bankrate.com. "The cumulative impact of the two rate cuts saves about $37 a year for a cardholder carrying a $5,000 balance," he says.

CDs, Money-Market Accounts, Money-Market Funds

Savers are benefiting from the shaky credit markets, even as the Fed cuts rates. That's because banks are still looking to CDs and money-market accounts as a way to bring in funds, according to McBride. Despite a 75-basis-point cut in the fed funds rate since September, banks have been reluctant to drop yields before the competition does. "Yields have slipped a bit, but not nearly as much as had been expected," McBride says. Since the September rate cut, CD yields have dropped only 12 to 25 basis points. Yields on the top-yielding money-market savings accounts are generally 10 basis points lower, from 5.35% or so to 5.25%. Today's rate cut will not place those yields in jeopardy, McBride says.

Money-market fund yields have also remained strong thanks to the credit market turmoil. Typically, Fed rate cuts are passed down to investors within 35 days, but yields dropped only 26 basis points after the Fed cut 50 basis points in September, says Peter Crane, publisher of Money Fund Intelligence, which tracks money-market funds. Average yields fell from 5.05% to 4.79%. The reason: Roughly half of money-market securities are actually invested in asset-backed commercial paper or benchmarked to the LIBOR, Crane explains. Recent concerns about possible exposure to subprime mortgages have imposed a risk premium on asset-backed commercial paper, so yields have remained higher. That said, Crane expects today's 25-basis-point cut to trickle down to investors over the next month. Top yields should fall to about 4.45%.