The Federal Reserve Prepares for Rate Cut: Impact on Your Money

The Federal Reserve is preparing to cut interest rates, which will affect your finances. This decision could lower borrowing costs for loans and mortgages, decrease interest earnings on savings accounts, and influence investment returns. Understanding these changes can help you manage your money more effectively in the evolving economic environment.

The Federal Reserve announced on Wednesday that it will keep interest rates unchanged.

However, signs of economic growth and decreasing inflation suggest a likely rate cut in September, which would benefit Americans dealing with high interest charges. Fed Chair Jerome Powell indicated that rate cuts could occur at the next meeting if economic data supports it.

“We think that the time is approaching,” Powell stated. “If we receive the data we anticipate, then a policy rate reduction could be on the agenda for the September meeting.” More from Personal Finance: Housing affordability is improving. 'Recession pop' trends in music reflect economic patterns. More Americans face challenges even as inflation decreases.

“Consumers should feel optimistic about the U.S. economy,” said Brett House, an economics professor at Columbia Business School. “We see inflation decreasing, growth stabilizing, and reduced price pressures.” Inflation has been a persistent issue since the Covid-19 pandemic, reaching its highest levels in over 40 years. The Fed responded with interest rate hikes, pushing its benchmark rate to the highest in decades.

The rise in interest rates caused consumer borrowing costs to surge, putting many households under financial strain. Customers shopping for school supplies with an employee restocking shelves at a Target store in Queens, New York. Customers shopping for school supplies with an employee restocking shelves at a Target store in Queens, New York. Lindsey Nicholson | UCG | Universal Images Group | Getty Images As the central bank prepares to lower interest rates for the first time in years during the September meeting, consumers may start to see reduced borrowing costs, with some already benefiting.

The federal funds rate, set by the U.S. central bank, is the rate at which banks borrow and lend overnight. Although it’s not the consumer rate, the Fed's actions still influence everyday borrowing and savings rates. “The initial rate cut won’t significantly impact consumer finances, but it will start a series of cuts expected to continue into next year,” House noted. This could lower the Fed’s benchmark rate from its current 5.25%-5.50% range to below 4% by the end of next year, according to some experts.

From credit cards and mortgages to auto loans and student debt, here’s a look at how these monthly interest expenses might change as the initial rate cut approaches. Credit cards Most credit cards have a variable rate linked directly to the Fed’s benchmark. After recent rate hikes, the average credit card rate increased from 16.34% in March 2022 to over 20% today, nearing a record high. Simultaneously, with the high cost of living, credit card balances have risen, with more cardholders carrying debt or falling behind on payments.

A Philadelphia Federal Reserve report recently showed record credit card delinquencies since 2012. Revolving debt balances also reached new highs as banks tightened credit standards and reduced new card issuances. For those paying 20% or more on revolving balances, interest rates will decrease with Fed rate cuts but will remain high, offering limited relief, according to Greg McBride, chief financial analyst at Bankrate.com. “Rates won’t drop quickly enough to rescue anyone from a bad situation,” McBride said. The best strategy for those with credit card debt is to proactively manage it, suggested Matt Schulz, chief credit analyst at LendingTree.

“They can do this by obtaining a 0% balance transfer credit card, a low-interest personal loan, or negotiating a lower interest rate with their card issuer,” Schulz advised. “This is more effective than many might expect.” Mortgage rates While 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by the Fed’s policy. Home loan rates have already begun to fall, mainly due to the potential for a Fed-induced economic slowdown.

The average rate for a 30-year fixed-rate mortgage is now below 7%, according to Bankrate. “If we continue to receive positive news on inflation, mortgage rates could keep decreasing,” said Jacob Channel, senior economist at LendingTree. “Significant drops aren’t expected immediately, but rates might return to their 2024 lows over the coming weeks and months,” he added.

“If things go well, the average rate on a 30-year fixed mortgage could be closer to 6% by year’s end.”

While this might not seem significant at first, Channel noted, a nearly 50 basis-point drop “is notable in the mortgage world.” A basis point is one-hundredth of a percentage point. Auto loans Auto loans are fixed. However, payments have been rising because of higher interest rates on new loans and increasing car prices, making monthly payments less affordable. The average rate on a five-year new car loan is now just under 8%, according to Bankrate.

“The financing rate is just one factor, and a relatively small one,” McBride said. For example, a quarter-point rate reduction on a $35,000, five-year loan equates to $4 a month, he explained. Improving credit scores would benefit consumers more, leading to better loan terms, McBride suggested.

Student loans Federal student loan rates are fixed, so most borrowers aren’t immediately affected by Fed moves. However, undergraduates who took out federal student loans for the 2023-24 academic year are paying 5.50%, up from 4.99% in 2022-23. For the 2024-2025 academic year, the rate will be 6.53%, the highest in a decade. Private student loans often have variable rates tied to the prime rate, Treasury bill, or another index, meaning these borrowers already face higher interest. The increase varies with the benchmark rate.

For those struggling with debt, federal borrowers have options like economic hardship and unemployment deferments. The income-based student loan repayment plan, known as SAVE, is currently on hold due to legal challenges.

Private loan borrowers have fewer relief options, but some may consider refinancing when rates drop, with better credit potentially qualifying them for lower rates. Savings rates While the central bank doesn’t directly control deposit rates, they tend to correlate with changes in the target federal funds rate.

Consequently, top-yielding online savings account rates have risen significantly, now paying up to 5.5% — surpassing inflation, a rare advantage for those building savings, according to McBride. However, these rates will decline once the central bank lowers its benchmark, he added. “If you’re considering a certificate of deposit, now is the time to secure it,” McBride advised. “Yields won’t improve, so there’s no benefit in waiting.”

Currently, a top-yielding one-year CD offers over 5.3%, comparable to a high-yield savings account.

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Source: cnbc‍