Recent signs of easing inflation are paving the way for the Federal Reserve to cut interest rates at its meeting next week, which is welcome news for Americans struggling to keep up with the rising cost of living and high interest rates.
“Consumers need to feel good [an interest rate reduction] but it’s not going to provide significant immediate relief,” said Brett House, an economics professor at Columbia Business School.
Inflation has been a persistent problem since the Covid-19 pandemic, when price increases shot to their highest levels in more than 40 years. The central bank responded with a series of rate hikes that pushed its key interest rate to its highest level in decades.
Rising interest rates have caused most consumers’ borrowing costs to rise, putting many households under pressure.
More from Personal Finance:
The ‘vibecession’ ends as the economy nails a soft landing
“Recession pop” is in: How music bucks economic trends
More Americans are struggling even as inflation cools
“The cumulative progress in inflation — evidenced by the CPI now at 2.5% after peaking at 9% in mid-2022 — has given the Federal Reserve the green light to start cutting interest rates at next week’s meeting,” said Greg McBride, head. financial analyst at Bankrate.com, referring to consumer price indexa broad measure of the cost of goods and services across the US economy.
But the impact from the first rate cut, expected to be a quarter of a percentage point, “is very minimal,” McBride said.
“What borrowers can be optimistic about is that we will see a series of rate cuts that will cumulatively have a significant impact on borrowing costs, but it will take time,” he said. “A rate cut will not be a panacea.”
Markets are pricing in a 100% chance the Fed will begin cutting interest rates when it meets on Sept. 17-18, with the potential for more aggressive moves later in the year, according to CME Group’s FedWatch gauge.
That could bring the Fed’s key federal funds rate from the current range of 5.25% to 5.50% to below 4% by the end of 2025, according to some experts.
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 lending and savings rates they see every day.
Interest rates on everything from credit cards to auto loans to mortgages will be affected once the Fed starts lowering its benchmark. Here’s a breakdown of what to expect:
Credit cards
Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card interest rate has risen from 16.34% in March 2022 to more than 20% today — near an all-time high.
For those paying 20% interest — or more — on a revolving balance, annual percentage rates will begin to decline when the Fed lowers rates. But even then they will only relax from extremely high levels, according to McBride.
“The Fed has to do a lot of rate cuts just to get to 19 percent, and that’s still significantly higher than where we were just three years ago,” McBride said.
The best move for those with credit card debt is to switch to a 0% balance transfer credit card and aggressively pay down the balance, he said. “Rates won’t fall fast enough to bail you out.”
Mortgage rates
While 15- and 30-year mortgage rates are fixed and tied primarily to Treasury yields and the economy, they are partly influenced by Fed policy. Mortgage rates have already started to fall, largely due to the prospect of an economic slowdown due to the Fed.
As of Sept. 11, the average interest rate on a 30-year fixed-rate mortgage was about 6.3 percent, down nearly a full percentage point from rates in May, according to the Mortgage Bankers Association.
But even as mortgage rates are falling, home prices remain at or near record highs in many areas, according to Jacob Channel, senior economist at LendingTree.
“This cut is not going to completely reshape the economy and it’s not going to make it any easier to buy a home or pay off debt,” he said.
Car loans
“Auto loan rates are going to go lower, too, but you shouldn’t expect the blocking and handling of auto purchases to change anytime soon,” said Matt Schulz, chief credit analyst at LendingTree.
The average interest rate on a five-year new car loan is now about 7.7%, according to Bankrate.
While anyone planning to finance a new car could benefit from the lower interest rates ahead, the Fed’s next move won’t have any material effect on what you get, Bankrate’s McBride said. “No one is upgrading from a compact to an SUV with a quarter point rate cut.” A quarter of a percentage point difference on a $35,000 loan is about $4 a month, he said.
Consumers would benefit more from improving their credit scores, which could pave the way for even better loan terms, McBride said.
Student loans
Federal student loan interest rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable interest rate tied to the government account or other interest rates, meaning that once the Fed starts lowering interest rates, the interest rates on those private student loans will go down. as Well.
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.
However, refinancing a federal loan into a private student loan would forego the safety nets that come with federal loans, he said, “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.
savings rates
While the central bank has no direct influence on deposit rates, returns tend to correlate with changes in the target federal funds rate.
As a result of the Fed’s string of rate hikes in recent years, rates on top-performing online savings accounts have made significant moves and now pay well above 5% with no minimum deposit, according to Bankrate’s McBride.
With rate cuts on the horizon, those “deposit rates will come down,” he said. “But the important thing is, what’s your return relative to inflation — and that’s the good news. You’re still earning a return that’s greater than inflation, as long as you have your money in the right place.”
