Money movements to consider ahead of Fed rate cut

The Federal Reserve could start cutting interest rates as early as next month, based on the latest inflation data.

“We think the time is coming,” Fed Chairman Jerome Powell said at a news conference after the Federal Open Market Committee’s last meeting in July.

For Americans struggling to keep up with high interest rates, a potential rate cut in September could bring some welcome relief — even more so with the right planning.

“If you’re a consumer, now is the time to say, ‘How are my expenses looking?’ Where will my money grow the most and what options do I have?” said Leslie Tayne, a debt relief attorney at Tayne Law in New York and author of “Life & Debt.”

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Fed officials said they expect to cut the benchmark rate once in 2024 and four times in 2025.

That could bring the benchmark Fed Funds rate from its current range of 5.25% to 5.50% to below 4% by the end of next year, according to some experts.

The federal funds rate is what banks borrow and lend to each other overnight. While that’s not the rate consumers pay, the Fed’s moves still affect the interest rates they see every day on things like private student loans and credit cards.

Here are five ways to position your finances for the coming months:

Since interest rates on online savings accounts, money market accounts and Certificates of deposit are all set to fall, experts say this is the time to lock in some of the highest returns in decades.

Although these rates will come down once the central bank lowers its benchmark, a typical saving of around $8,000 in a bank or savings account could earn an extra $200 a year by moving that money into a high-yield account that earns interest of 2.5% or more, according to recent Santander Bank research in June. The majority of Americans keep their savings in traditional accounts, Santander found, which FDIC data currently shows paying 0.45%on average.

Alternatively, “now is a good time to lock in the most competitive CD yields at a level that is well ahead of targeted inflation,” said Greg McBride, chief financial analyst at Bankrate.com. “There’s no point in waiting for better returns later.”

Currently, a one-year top-yield CD pays more than 5.3%, according to Bankrate, as good as a high-yield savings account.

With a rate cut, the prime rate also falls, and interest rates on floating-rate debt — mostly credit cards — are likely to follow, lowering your monthly payments. But even then, APRs will only reduce the extremely high levels.

For example, the average interest rate for a new credit card today is nearly 25%, according to LendingTree data. At that rate, if you pay $250 a month on a card with a $5,000 balance, it will cost you more than $1,500 in interest and take 27 months to pay off.

If the central bank cuts interest rates by a quarter of a point, you’ll save $21 and be able to pay off the balance a month faster. “That’s nothing, but it’s a lot less than what you could save with a 0% balance transfer credit card,” said Matt Schulz, chief credit analyst at LendingTree.

Instead of waiting for a small adjustment in the coming months, borrowers could switch now to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a personal loan, Tayne said.

If you’re planning a big purchase, such as a house or a car, then it may be worth waiting as lower interest rates could reduce the cost of financing later.

“Timing your purchase to coincide with lower interest rates can save you money over the life of the loan,” Tayne said.

Although mortgage rates are fixed and linked to Treasury yields and the economy, have already begun to retreat from recent highs, largely due to the prospect of a Fed-induced economic slowdown. The average interest rate on a 30-year fixed-rate mortgage is now about 6.5%, according to Freddie Mac.

Compared to a recent high of 7.22% in May, today’s lower rate on a $350,000 loan would result in savings of $171 a month, or $2,052 a year, and $61,560 over the life of the loan, according to calculations by Jacob Channel, senior financial officer. analyst at LendingTree.

But going forward, lower mortgage rates could also boost demand for housing, which would push prices higher, McBride said. “If lower mortgage rates lead to higher prices, that will offset the affordability advantage for would-be buyers.”

Exactly what will happen in the housing market “is up in the air” depending on how much mortgage rates fall in the second half of the year and the level of supply, according to Channel.

“Market timing is virtually impossible,” he said.

For those struggling with existing debt, there may be more options for refinancing once interest rates fall.

Private student loans, for example, tend to have a variable interest rate tied to the underlying index, bond, or other interest rate index, meaning that once the Fed starts lowering rates, the interest rates on those private student loans will also decrease.

When it comes to Car loans, for example, there’s no doubt that inflation has hit finance costs hard – and vehicle prices. The average interest rate on a five-year new car loan is now nearly 8%, according to Bankrate.