Top money moves ahead of Fed rate cut, experts say

Last week, US Federal Reserve Chairman Jerome Powell confirmed that interest rates will be cut soon.

“It’s time to adjust policy,” the central bank leader said in his keynote speech at the Fed’s annual retreat in Jackson Hole, Wyoming.

For Americans struggling to keep up with high interest rates, a possible quarter-point cut in September could bring some welcome relief — especially with the right preparation. (A more aggressive half-point move has about a 1 in 3 chance of happening, according to CME’s FedWatch measure of futures market pricing.)

“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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The federal funds rate is currently at its highest level in two decades, in a range of 5.25% to 5.50%.

If the Fed cuts interest rates in September, as expected, it would be the first time officials have cut their benchmark in more than four years, when they cut them to near zero at the start of the Covid-19 pandemic.

“From a consumer perspective, it’s important to note that lower interest rates will be a gradual process,” said Ted Rossman, senior industry analyst at Bankrate.com. “The downward journey is likely to be much slower than the string of rate hikes that quickly pushed the federal funds rate higher by 5.25 percentage points in 2022 and 2023.”

Here are five ways to prepare for this policy change:

With a rate cut, the prime rate also drops, and interest rates on variable-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, you’ll save a total of $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.

Rather than 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 lower-interest personal loan, Tayne said.

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-performing online savings accounts pay more than 5% — well above the rate of inflation.

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 show currently paying 0.46%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. “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.

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 under 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 drop.

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.

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, he said.

However, refinancing a federal loan into a private student loan would forego the safety nets that come with federal loans, he added, “such as deferments, forbearances, income-based repayment and loan forgiveness and discharge options.” Plus, extending the loan term means you’ll end up paying more interest on the balance.

Watch out for potential loan extensions, warned David Peters, founder of Peters Professional Education in Richmond, Virginia. “Consider keeping your down payment after refinancing to remove as much principal as possible without changing your out-of-pocket cash flow,” he said.

Similar considerations may also apply to home and auto loan refinancing opportunities, depending in part on the prevailing interest rate.

Those with better credit could already qualify for a lower interest rate.

When it comes to auto loans, for example, 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-percentage-point drop in interest rates on a five-year, $35,000 loan is $4 a month, he calculated.

Here, and in many other cases, too, consumers would benefit more from paying off revolving debt and improving their credit scores, which could pave the way for even better loan terms, McBride said.