How to Leverage the Fed’s First Rate Cut in Years: Expert Tips
Explore expert advice on how to capitalize on the Federal Reserve's first rate cut in years. Financial experts offer strategies for optimizing investments, managing debt, and adjusting financial plans to make the most of this economic shift. Learn how to navigate the changing interest rate landscape to enhance your financial position effectively.
The Federal Reserve might begin reducing interest rates as early as next month, based on the latest inflation data.
Fed Chair Jerome Powell hinted at this possibility during a press conference after the July Federal Open Market Committee meeting.
For those burdened by high interest rates, a potential rate cut in September could offer significant relief with proper planning.
Leslie Tayne, a New York-based debt relief attorney and author of “Life & Debt,” advises consumers to evaluate their spending, identify growth opportunities, and explore available options.
Fed officials have indicated they plan to lower the benchmark rate once in 2024 and four times in 2025.
Experts predict this could reduce the benchmark fed funds rate from its current range of 5.25% to 5.50% to below 4% by the end of next year.
The federal funds rate, which banks use for overnight borrowing, influences the rates consumers see on loans and credit cards, despite not being the exact rate they pay.
Here are five strategies to optimize your finances in the coming months:
Lock in a high-yield savings rate: With rates on savings accounts, money market accounts, and CDs expected to decrease, now is an opportune time to secure high returns. Online savings accounts currently offer rates over 5%, surpassing inflation. Moving $8,000 into a high-yield account could earn an additional $200 annually compared to a traditional account. Greg McBride of Bankrate.com suggests locking in competitive CD yields now, as they are currently over 5.3%.
Pay down credit card debt: A rate cut will lower the prime rate, which in turn will reduce interest rates on variable-rate debts like credit cards. However, APRs will still be high. With average credit card rates nearing 25%, paying off a $5,000 balance could cost over $1,500 in interest. A quarter-point rate cut might save $21 and reduce the payoff time by one month. Matt Schulz of LendingTree suggests considering a 0% balance transfer card or consolidating high-interest credit card debt with a personal loan.
Consider the timing of major purchases: For significant purchases like homes or cars, waiting for lower rates could be beneficial. Although mortgage rates are currently around 6.5%, down from recent highs, they could decrease further. Lower mortgage rates could save $171 per month on a $350,000 loan compared to rates from May. However, lower rates might increase homebuying demand and push prices higher. The future of the housing market remains uncertain, and timing the market is challenging.
Evaluate refinancing options: Lower rates could open up refinancing opportunities for existing debts. For private student loans with variable rates, refinancing into a fixed-rate loan could become more affordable. Mark Kantrowitz advises that while fixed-rate loans currently range from 5% to 11%, refinancing federal loans into private loans may forfeit protections like deferments and income-driven repayment options. Consider extending the loan term cautiously, as it can increase total interest paid.
Improve your credit score: A better credit score can help secure lower interest rates. Inflation has affected financing costs, including auto loans, with average rates now around 8% for a five-year new car loan. Improving credit scores can lead to better loan terms, potentially offering more savings than a slight reduction in rates. Paying down revolving debt and enhancing credit scores are effective strategies for securing favourable loan conditions.
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