What Impact May Rate Cuts Have?
Fed Rate Cuts Will Have an Effect Across the Board, How Will it Affect You?
The Federal Reserve is expected to cut its benchmark interest rate next month from its 23-year high, which could significantly impact consumer finances, including debt, savings, auto loans, and mortgages. Currently, most experts anticipate three quarter-point cuts by the Fed in September, November, and December, although larger cuts are also possible.
Federal Reserve Chair Jerome Powell stated at the Fed’s annual economic conference in Jackson Hole, Wyoming: “The time has come for the Fed to reduce interest rates. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Based on Powell’s remarks and recent economic trends, a quarter-point rate cut is widely expected next month, with additional cuts to follow.
What Do Rate Cuts Mean for Savers?
Savers should consider locking in attractive yields now, before rate cuts take effect. Greg McBride, Chief Credit Analyst for Bankrate, advises those considering Certificates of Deposit (CDs) or bonds to act quickly: “There is not a benefit to waiting because interest rates are going to be moving lower.” He also emphasized that those nearing retirement have an excellent opportunity to secure CDs at current high rates, ensuring a stable flow of interest income that should outpace inflation.
Impact on Credit Card Debt and Borrowing
Matt Schulz, Chief Credit Analyst at LendingTree, cautions that consumers should not expect immediate relief: “Your credit card bill is not going to plunge the day after the next Fed meeting. Nobody should expect miracles.” While declining benchmark rates will eventually lead to better borrowing conditions, current credit card interest rates remain high, averaging 23.18% for new offers and 21.51% for existing accounts, according to WalletHub’s August Credit Card Landscape Report.
In the short term, Schulz suggests that consumers explore options such as 0% interest balance transfers, low-interest personal loans, or negotiating better rates with their credit card issuers.
Mortgage Rate Trends
While the Fed’s benchmark rate doesn’t directly dictate mortgage rates, the two often move in tandem. LendingTree Senior Economist Jacob Channel notes that mortgage rates have already shown signs of declining ahead of the Fed’s anticipated rate cuts. This shift has sparked interest among homeowners considering refinancing.
Melissa Cohn, Regional Vice President of William Raveis Mortgage, highlights that many who locked in mortgage rates over the past 18 months at higher levels are now evaluating the potential savings of refinancing. “The outlook is good, and hopefully that spills into the real estate market, attracting more buyers,” Cohn said. However, with most Americans having mortgages around 5%, rates may need to fall further from the current average of 6.46% to drive significant refinancing activity.
Auto Loans and the Impact of Rate Cuts
For those considering auto loans, McBride notes that while falling rates are welcome news, it remains crucial to shop around for the best deal and aim to make a substantial down payment. He predicts that rate cuts, combined with avoiding a recession, could lower auto loan rates in 2024 for borrowers with strong credit. However, double-digit rates might persist for those with lower credit profiles throughout the year.
Economic Indicators: Inflation and Employment
The inflation rate showed a positive sign last month, with consumer prices rising just 2.9% in July compared to the previous year—the smallest increase in over three years. However, mixed employment data presents a more complex picture. Hiring in July was lower than expected, and the unemployment rate climbed to 4.3%, the highest in three years. These indicators point to a possible economic slowdown, although strong retail sales have helped ease recession concerns.
The Fed’s pace of rate cuts beyond September will largely depend on upcoming developments in inflation and the job market. As these factors evolve, the central bank will adjust its monetary policy to support economic stability and growth.
