What's the impact on your finances?

WASHINGTON — With the market dropping, the economy softening and prices spiking, it's an unsettling time for many Americans. Here are some answers to key questions consumers face:

Q. Will my credit-card and other interest rates fall after Tuesday's action by the Fed?

A. Yes. Cutting the target for the federal funds rate to 3.5 percent means that the prime rate should fall by an equal amount, to 6.5 percent. Since most Americans have variable-rate credit cards that are tied to the prime rate, interest rates on those cards should drop in the coming weeks along with interest rates on home-equity lines of credit.

Q. What about my mortgage?

A. The Fed's action doesn't affect existing fixed-rate mortgages. The interest rates on new fixed-rate mortgages generally are tied to inflation and the yield on long-term bonds, and both of those reflect conditions in the general economy. Consumer inflation last year was 4.1 percent — the highest in 17 years — and the economy faces the threat of recession, suggesting that fixed mortgage rates may rise rather than fall.

For homeowners with adjustable-rate mortgages, the Fed's move is a mixed bag. There will be little immediate impact for existing ARMs that reset based on the London Inter-Bank Offering Rate (Libor) or on an index of Treasury securities. For homeowners with ARMs that reset off one-year Treasury bills, the rate has dropped to 5.25 percent from 7.5 percent last summer and could fall further this year.

Q. Is this a good time to refinance my mortgage?

A. Yes, if you have good credit and the value of your home is holding steady. For homeowners with adjustable-rate mortgages, it's a particularly good time to refinance to a fixed-rate mortgage.

Q. Will the rate cut help borrowers on the verge of foreclosure?

A. No. The Fed's rate cut won't be of much assistance to borrowers with shaky, or subprime, credit, who want to escape their high-interest-rate home loans. Lenders have become wary of those borrowers after defaults and foreclosures soared last year.

Q. What does the rate cut mean for savings accounts and certificates of deposit?

A. Lower interest rates result in lower yields for savings accounts and CDs, and are bad news for those who depend on those accounts for income. Barry Glassman, a financial planner in McLean, Va., said those investors should be aware of the potential for inflation to erode their buying power, and should consider investments such as securities that guard against inflation.

Q. What will lower interest rates do for the cost of gasoline and food?

A. If a recession is under way, the assumption is that worldwide demand for oil and other commodities will fall, driving down prices at gas stations and supermarkets. But if the Federal Reserve, the White House and Congress are successful in correcting the economy, inflation for those consumer goods could pick up.

Q. What should I do to protect my 401(k) and other investments?

A. There are several things to remember: Stock-market investors should be in it for the long haul, about 10 to 15 years, said Barbara Roper, the director of investor protection at the Consumer Federation of America. Investors shouldn't try to respond to every bit of market upheaval by "reshuffling" their portfolios.

That said, the current market volatility presents a good time to do a financial checkup to see whether your investment portfolio is too risky or you have more invested than you can afford, Roper said. Those decisions should be based on your own financial circumstances and investment goals. It's also a good idea to contact a fee-only personal financial adviser to help make those decisions. Fee-only financial planners are paid solely by client fees and don't accept commissions or compensation from other sources.

Q. How can I "recession-proof" my investment portfolio?

A. Make sure your investments are balanced and diversified with domestic and international holdings, and with stocks and bonds. "Properly setting your asset allocation and not making abrupt shifts due to market volatility is critical," said Ellen Rinaldi, principal and head of Vanguard's Investment Counseling & Research group. Rinaldi also recommends starting an emergency fund with three to six months of living expenses "so you don't panic when something like this happens."

Q. What advice do you have for investors who aren't afraid to stay in the market?

A. Drew Tignanelli, the president of The Financial Consulate of Lutherville, Md., advises wealthy investors with considerable cash. Among that group, shrewd investors are considering buying commodity stocks, such as oil, gold, copper and agriculture. He also suggests that fast-growing Asian markets can outpace U.S. inflation. Consider mutual funds that invest in China, Korea, Taiwan, Hong Kong and Japan, Tignanelli said. Technology stocks, which probably will lead the way when a recovery occurs, also should be considered. Tignanelli said most technology companies had little, if any, debt and had lots of cash on their balance sheets. "In a credit crunch and in an inflationary environment, cash is king," Tignanelli said.

Material from The Associated Press is included in this report.