The Fed Holds Steady, But Rate Cuts Are On The Horizon: What It Means For Your Wallet
The Federal Reserve announced on Wednesday that it would leave interest rates unchanged, but with signs of economic growth and cooling inflation taking shape, the central bank is paving the way for a widely anticipated rate cut in September. This news is a welcome relief for Americans facing sky-high interest charges on everything from credit cards to mortgage payments.
Key Takeaways:
- The Fed’s decision to hold rates steady was expected, as the economy continues to show signs of improvement. This is in stark contrast to the rapid series of interest rate hikes the Fed implemented in 2022 and 2023 in response to soaring inflation.
- A rate cut in September is now widely anticipated. Many economists and financial experts believe the Fed will lower interest rates for the first time in years at its next meeting, citing continued downward trends in inflation and the potential for an economic slowdown.
- Rate cuts will bring some relief to consumers struggling with higher borrowing costs. This will be particularly significant for those with variable-rate loans, such as credit cards, as lower interest rates will reduce their monthly payments.
Credit Cards: A Slight Relief, But Not A Magic Bullet
Since most credit cards have a variable interest rate, their rates directly correlate with the Fed’s benchmark rate. The average credit card rate has skyrocketed in recent years, climbing from 16.34% in March 2022 to over 20% today – nearing an all-time high. This surge, coupled with high living costs, has led to increased credit card balances and more cardholders carrying debt or falling behind on payments.
While the anticipated rate cuts will bring some relief by lowering annual percentage rates, they will only ease the pressure on extremely high interest levels. "Rates are not going to fall fast enough to bail you out of a bad situation," says Greg McBride, chief financial analyst at Bankrate.com.
Consumers with credit card debt should proactively look for ways to lower their interest rates, including:
- Balance transfers to 0% APR credit cards or low-interest personal loans.
- Negotiating a lower interest rate with their card issuer.
Mortgage Rates: A Modest But Meaningful Drop
While 15-year and 30-year mortgage rates are fixed, they are still influenced by the Fed’s policy, especially due to the connection to Treasury yields and overall economic conditions. Mortgage rates have already started to fall, primarily driven by the prospect of a Fed-induced economic slowdown.
The average rate for a 30-year, fixed-rate mortgage currently sits just below 7%, according to Bankrate. Experts predict continued downward movement in mortgage rates, with possibilities for a return to 2024 lows in the coming weeks and months.
"If all goes really well, we could even end the year with the average rate on a 30-year, fixed mortgage closer to 6% than 6.5% or 7%," suggests Jacob Channel, senior economist at LendingTree. Such a drop may seem slight, but in the world of mortgages, it represents a meaningful positive development for borrowers.
Auto Loan Rates: A Smaller Impact, But Credit Score Still Matters
Auto loan rates are fixed, but rising interest rates combined with increased car prices have pushed monthly payments higher, making car affordability a growing concern. The average rate for a five-year new car loan currently sits just under 8%, according to Bankrate.
"The financing is one variable, and it’s frankly one of the smaller variables," explains McBride. A quarter percentage point reduction in rates on a $35,000 loan over five years would only save a borrower approximately $4 per month.
Improving credit scores remains a more effective way for consumers to secure better auto loan terms. A stronger credit score can lead to lower interest rates, significantly reducing monthly payments over the life of the loan.
Student Loan Rates: Uncertain Future, More Focus on Federal Borrowers
Federal student loan rates are fixed, so most borrowers are not directly affected by the Fed’s actions. However, the interest rate on new federal direct undergraduate loans for the 2024-2025 academic year climbed to 6.53%, marking the highest rate in at least a decade. This emphasizes the need for federal borrowers to closely manage their repayment plans and consider options like income-driven repayment programs to minimize long-term costs.
Private student loans typically have a variable rate tied to an index, meaning borrowers are already experiencing higher interest payments. The impact of the Fed’s future decisions on private student loans will depend on the specific benchmark tied to each individual loan.
Savings Rates: A Good Time to Lock In Yields
While the Fed doesn’t directly control deposit rates, they tend to correlate with its benchmark rate. The current economic climate has pushed top-yielding online savings account rates up to 5.5%, significantly exceeding the rate of inflation. This presents a rare opportunity for individuals building a cash cushion to earn a favorable return on their savings.
"If you’ve been considering a certificate of deposit, now is the time to lock it in," advises McBride, as rates are expected to decline once the Fed reduces its benchmark rate. This decline will likely result in lower yields on both savings accounts and CDs in the future.
Looking Ahead: A Gradual Shift in The Financial Landscape
The anticipated rate cuts in September and beyond represent a significant shift in the financial landscape. While the initial impact may be subtle, the cumulative effect over time is likely to be substantial, easing pressure on borrowers and promoting economic growth. Although the immediate relief may feel incremental, it marks a turning point in the Fed’s monetary policy, setting the stage for a more favorable financial environment for consumers moving forward.