People shop at a grocery store in New York City on August 14, 2024.
Spencer Pratt | Getty Images
this Fed Announcing a cut in benchmark interest rates on Wednesday half a percent, or 50 basis pointspaving the way for relief from high borrowing costs that have hit consumers particularly hard.
The federal funds rate is set by the U.S. central bank and is the rate at which banks lend money to each other overnight. While that’s not the rate consumers will pay, the Fed’s move still Affects lending and savings rates They see it every day.
Wednesday’s rate cut sets the federal funds rate in a range of 4.75%-5%.
A series of interest rate hikes starting in March 2022 has taken the central bank’s benchmark interest rate to its highest level in 22 years, causing most consumers to borrowing costs soaring – and putting many families under pressure.
Now, with inflation receding, there is “reason to be optimistic,” said Greg McBride, chief financial analyst at Bankrate.com.
However, “for borrowers facing high financing costs, a single rate cut is not a panacea and will have a minimal impact on overall household budgets,” he said. “More important is the cumulative effect of a series of rate cuts over time.”
More from Personal Finance:
The ‘shock’ is ending as economy soft lands
A ‘recession epidemic’ is coming: How music affects economic trends
Even as inflation cools, more Americans still struggle
“When interest rates change, there are always winners and losers,” said Stephen Foster, a finance professor at the Ivey Business School in London, Ontario. “Overall, lower interest rates are good for borrowers but bad for lenders and savers.”
“It really depends on whether you are a borrower or a saver, or whether you currently have a borrowing rate or a savings rate locked in,” he said.
From credit card and mortgage rates to car loans and savings accounts, here’s how the Fed’s rate cuts could impact your finances in the coming months.
credit card
Since most credit card There are floating interest rates, which are directly tied to the Federal Reserve’s benchmark. Due to the influence of the central bank’s interest rate hike cycle, the average interest rate of credit cards has risen from 16.34% in March 2022 to more than 20% today – close to record high.
Going forward, annual interest rates will start to fall, but even then they will only come down from extremely high levels. McBride said that with only a few cuts in 2024, annual rates will still be around 19% in the coming months.
“Interest rates go up by elevator, but they also go down by stairs,” he said.
That makes paying off high-cost credit card debt a priority because “interest rates aren’t going down fast enough to get you out of the hole,” McBride said. “Zero percent balance transfer offers are still a great way to accelerate your credit card debt payoff efforts.”
mortgage interest rate
Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, those who bought new homes over the past two years have lost considerable purchasing power, in part due to inflation and the Federal Reserve’s policy moves. .
But interest rates are already significantly lower than they were just a few months ago. The average interest rate on a 30-year fixed-rate mortgage right now is about 6.3%, according to Bankrate.
LendingTree senior economist Jacob Channel predicts that mortgage rates will remain in the 6% to 6.5% range in the coming weeks, and may even drop below 6%. But he said they were unlikely to return to pandemic-era lows.
“Although mortgage rates are falling, they remain relatively high compared with much of the past decade,” he said. “What’s more, home prices in many areas remain at or near historic highs.” The Fed took this step because “until the market becomes cheaper, many people will still be unable to buy,” Channel said.
car loan
Although car loan is fixed and higher vehicle price Jessica Caldwell, director of insights at Edmunds, said high borrowing costs have pushed car buyers “to their financial limits.”
Edmonds said the average interest rate on a five-year new car loan is now over 7%, up from 4% when the Fed started raising rates. However, the Fed’s rate cut will go some way to cushioning the impact of rising auto financing costs – potentially taking rates below 7% – in part due to competition among lenders and more incentives in the market.
“Many Americans have been putting off buying a car in the hope that prices and rates will fall, or that incentives will pay off,” Caldwell said. “A Fed rate cut won’t necessarily immediately get all those consumers back in the showrooms, but it will certainly It will help to restore more consumer sentiment among those who insist on buying cars.”
student loans
federal student loan interest rates Interest rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have private loans, those loans may be fixed or they may have variable interest rates tied to Treasury bills or other rates, which means that once the Fed starts cutting interest rates, the interest rates on those private student loans will be different for a period of time. decline. Mark Kantrowitz, a higher education expert, said it would be one to three months, depending on the benchmark.
Eventually, borrowers with variable-rate private student loans may be able to refinance into cheaper fixed-rate loans, he said. But refinancing federal loans into private student loans will give up the safety nets that come with federal loans, such as deferment, forbearance, income-driven repayment, and loan forgiveness and discharge options.
Additionally, extending the term of your loan means you’ll end up paying more interest on your balance.
savings rate
While the central bank has no direct influence on deposit rates, yields tend to be tied to changes in the target federal funds rate.
As the Federal Reserve raises interest rates, interest rates on the highest-yielding online savings accounts have changed significantly, and are now paying more than 5%— Most savers can make money Over the past 20 years, this number has risen from around 1% in 2022, according to Bankrate.
If you haven’t activated it yet high yield savings account or locked in deposit slip However, LendingTree credit analyst Matt Schulz says you may have missed the peak interest rates. However, “yields will not fall off a cliff immediately after the Fed cuts interest rates,” he said.
He suggested that while these rates may have reached their limits, it is still worth taking the time to take these steps now before rates fall further.
The current average interest rate on a one-year CD is 1.78%, but the highest-yielding CDs have interest rates of over 5%, which is as good or better than a high-yield savings account, according to Bankrate.
