Three cuts in two months to the nation's overnight bank interest rate by the Federal Reserve's Open Market Committee -- lowering it to 4.75 percent -- has sent some markets into a tizzy.

But every action does not have an equal and opposite reaction -- the rate cuts will have different effects on different issues.

Fixed-rate mortgages are tied to long-term rates, and are near 30-year lows right now. They are unlikely to be affected by Tuesday's cut.

Many adjustable-rate mortgages and home-equity loans are tied either to banks' prime rate -- which also declined Tuesday -- or, more often, to one-year Treasury bills. These should decline in response to the Fed's move, but adjustable mortgages typically reset only every six months or annually, so rates won't come down immediately.

Most auto loans are fixed-rate, and often are priced below-market rates as a sales incentive. But those that float above the prime rate should go down by one-quarter percentage point, the same amount as the prime-rate cut.

Many cards have interest rates pegged to the prime rate. But even with a one-quarter point drop, rates on adjustable credit cards will remain high. They are priced to account for the risk of making unsecured loans to cardholders and to cover the cost of high rates of loan defaults and bankruptcy filings.

Published: November 18, 1998

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