Recent signs that inflation is easing have paved the way for the Federal Reserve to begin cutting interest rates as soon as this fall.
The consumer price indexa key measure of inflation, fell in June for the first time in more than four years, the Labor Department said last week.
“With plenty of signs of a cooling economy, June’s CPI is certainly the ‘best evidence’ on inflation that Fed Chairman Jerome Powell said we need to see before the Fed starts cutting interest rates,” said Greg McBride. chief financial analyst at Bankrate.com;
With a rate cut now looking more likely, households may finally be relieved of the exorbitant borrowing costs that followed the latest string of rate hikes, which pushed the Fed’s benchmark interest rate to its highest level in decades.
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Fed officials said they expect to cut the benchmark rate once in 2024 and four more times in 2025.
The federal funds rate, set by the US central bank, is the rate at which 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.
“If you’re a consumer, now is the time to say, what does my spending look like? Where would 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.”
Here are three key strategies to consider:
1. Beware of floating rate debt
With a rate cut, the prime rate also goes down, and interest rates on variable-rate debt — such as credit cards, adjustable-rate mortgages and some private student loans — are likely to follow, lowering your monthly payments.
For example, credit card holders could see their annual percentage rate, or APR, drop within a billing cycle or two. But even then, APRs will only reduce the extremely high levels.
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.
Olga Rolenko | Moment | Getty Images
Many homeowners with ARMs, which are linked to various indices such as the prime rate, Libor or 11u District Cost of Funds, may see their interest rate drop as well — though not immediately, since ARMs generally only reset once a year.
Meanwhile, there are fewer options to give homeowners extra breathing room. “Your best move may be waiting to refinance,” McBride said.
Private student loans also 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 these private student loans will begin to fall.
Eventually, borrowers with existing variable-rate private student loans may also be able to refinance to a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz.
Currently, fixed rates on a private refinance are as low as 5 percent and 11 percent, Kantrowitz said.
2. Lock in savings rates
While borrowing will become less expensive, these lower interest rates will hurt savers.
With interest rates on online savings accounts, money market accounts and certificates of deposit poised to drop, experts say now is the time to lock in some of the highest returns in decades.
Currently, top-yield online savings accounts and one-year CDs pay more than 5% — well above the rate of inflation.
The opportunity to earn 5% annually on these cash investments may not last much longer.
Howard Hook
property consultant with EKS Associates
“One thing you might want to do is consider investing any idle cash you have in a higher-yielding money market fund,” said certified financial planner Howard Hook, senior wealth advisor at EKS Associates in Princeton, New Jersey. .
“Money market brokerage accounts typically pay higher interest rates than money market or savings accounts at banks,” he said in an emailed statement. “If the Fed really wants to cut interest rates five times in the next eighteen months (as currently projected), then the opportunity to earn 5% per year on these cash investments may not last much longer.”
3. Put off big purchases
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 down the road.
“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 stable and tied to bond yields and the economy, they have already begun to decline 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 just over 7%, according to Bankrate.
But 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.”
When it comes to auto loans, there’s no denying that inflation has hit financing costs — and vehicle prices — hard. The average interest rate on a five-year new car loan is now nearly 8%, according to Bankrate.
But in this case, “funding is one variable, and it’s honestly one of the smaller variables,” McBride said. For example, a quarter of a percentage point reduction in interest rates on a five-year, $35,000 loan is $4 a month, he calculated.
In this case, and many others, consumers would benefit most from improving their credit scores, which could pave the way for even better loan terms, McBride said.
