Following President-elect Donald Trump’s victory in the 2024 election, the Federal Reserve announced a 25 basis point cut to its benchmark interest rate. This move, the second rate reduction in as many months, comes after a period of high inflation and economic uncertainty. While the Fed operates independently, Trump’s vocal advocacy for lower rates played a significant role in the decision. The rate cut is expected to gradually trickle down to impact various aspects of consumer finances, from credit card debt to mortgage rates and savings accounts, though the effects may not be immediate or dramatic.
Key Takeaways: Fed Rate Cut and its Ripple Effects
- The Federal Reserve lowered its benchmark interest rate by 25 basis points, marking the second rate cut following a 50 basis point reduction in September.
- This decision comes amidst easing inflation and follows President-elect Trump’s calls for lower rates.
- The rate cut will likely lead to lower credit card APRs, though the impact won’t be immediate or substantial.
- Auto loan rates, while fixed, could see some relief as competition among lenders increases.
- Mortgage rates, tied to Treasury yields, might see modest downward pressure, although current economic uncertainty could limit the impact.
- Federal student loan rates remain unaffected, however, private student loan holders with variable rates could see some reduction.
- Savings account and CD rates are expected to decline as a consequence of the Fed’s actions but will still likely remain above inflation and remain attractive.
Credit Cards: A Slow Descent from Sky-High Rates
The direct link between the Fed’s benchmark rate and variable credit card rates means that the recent rate cuts will eventually lead to lower annual percentage rates (APRs). The average credit card rate soared to over 20% – near an all-time high – due to the Fed’s aggressive rate-hiking cycle from March 2022 to July 2023. While APRs have started to decline, the decrease has been modest so far. “Still, these are sky-high rates,” said Matt Schulz, LendingTree’s credit analyst. “While they’ll almost certainly continue to fall in coming months, no one should expect dramatically reduced credit card bills anytime soon.” Consumers are advised to actively seek better rates by shopping around, negotiating with their issuers, or considering 0% balance transfer offers instead of passively waiting for minimal APR adjustments.
Trump’s Proposed Credit Card Interest Cap
During his campaign, President-elect Trump proposed capping credit card interest rates at 10%. However, the implementation of such a measure would require congressional approval and likely face significant pushback from the banking industry. The feasibility and impact of this proposal remain uncertain.
Auto Loans: Navigating High Vehicle Prices and Financing Costs
Even though auto loan rates are generally fixed, the combined effect of surging vehicle prices and high borrowing costs, increased to around 7% for five-year new car loans (up from 4% before the Fed’s rate hikes), placed a significant burden on car buyers. While the Fed’s rate cuts won’t directly alter existing fixed rates, its ripple effects could provide additional downward pressure. “Amid this economic strain, it’s clear that President Trump’s promises of financial relief resonated with voters across the country,” said Jessica Caldwell, Edmunds’ head of insights. Increased competition between lenders and potentially more market incentives can assist with lowering financing costs slightly. The prospect of rates falling below 7% is possible, as the ripple effect of the lower interest rates are felt.
Trump’s Tax Deduction Proposal
Trump has also advocated for making the interest paid on car loans fully tax-deductible. The success of this proposal would hinge on its passage through Congress.
Mortgage Rates: A Complex Picture Amidst Economic Uncertainty
The housing market has been significantly impacted by escalating mortgage rates, significantly affecting affordability. While 15- and 30-year mortgage rates are fixed and largely influenced by Treasury yields and overall economic conditions, the Fed’s rate cuts could exert some downward pressure on these rates. President-elect Trump’s victory itself initially spurred a rise in the U.S. 10-year Treasury yield, pushing mortgage rates upwards. However, continued rate cuts could influence them downward. As of early November, the average rate for a 30-year fixed-rate mortgage stood at 6.81%, according to the Mortgage Bankers Association. Despite potential downward pressure from the Fed, mortgage rates are unlikely to see substantial declines given the prevailing economic uncertainty. “As long as investors remain worried about what the future may bring, Treasury yields, and, by extension, mortgage rates are going to have a tough time falling and staying down,” explained Jacob Channel, senior economist at LendingTree.
Student Loans: Limited Relief for Most Borrowers
The Fed’s rate cut offers limited relief for most student loan borrowers. Federal student loan rates are fixed, rendering them unaffected by changes in the Fed’s benchmark rate. Efforts to forgive student debt are also unlikely under the Trump administration. However, those holding private student loans with variable rates tied to Treasury bills or other benchmarks might see some reduction in their rates with the Fed’s move. This reduction, however, will be minimal. “A quarter-point cut will only cut monthly payments on variable-rate loans by ‘about $1 to $1.25 a month for each $10,000 in debt’,” calculated higher education expert Mark Kantrowitz.
Refinancing Considerations
Borrowers with private student loans might consider refinancing into a fixed-rate loan; however, such a move would mean relinquishing the protections that federal loans provide, such as deferments, forbearances, and income-driven repayment plans. Also, extending the loan term will increase the total amount of interest paid over the life of the loan.
Savings Rates: A Trade-off Between Earning and Inflation
While the Fed doesn’t directly dictate deposit rates, they are usually correlated with changes in the federal funds rate. The rate hikes of the previous period have resulted in competitive online savings account rates, currently exceeding 5% – the best for savers in almost two decades. With the Fed’s rate cuts, these rates are likely to decline. However, even with the decrease, “the most competitive yields still handily outpace inflation,” noted Greg McBride, chief financial analyst at Bankrate.com. One-year CDs average 1.76%, but top-yielding CDs offer rates surpassing 4.5%, remaining a fairly good option.
