How Will Your Finances Be Affected if the Fed Cuts Rates This Week?

Interest rates are anticipated to decrease for the first time in four years this week, but experts caution against expecting significant changes in personal finances.

As the Federal Reserve concludes its policy meeting on Wednesday, most economists believe the Fed will lower its benchmark, short-term federal funds rate. The question remains whether this reduction will be by a quarter-point or half-point from its 23-year high range of 5.25% to 5.50%. The outcome appears uncertain.

Regardless of the exact cut, analysts suggest that consumers should not expect any immediate relief. Financial institutions tend to be slow in adjusting the rates they charge to borrowers when the Fed makes a cut, while they are quicker to decrease the rates offered on savings accounts and certificates of deposit.

“While lower rates can be beneficial for those grappling with debt, this initial rate cut won’t significantly impact most individuals,” said Matt Schulz, a credit analyst at LendingTree. “The most effective approach for consumers to lower their interest expenses is to take proactive measures.”

Greg McBride, the chief financial analyst at Bankrate, emphasized the importance of the cumulative effect of multiple interest rate cuts over time, rather than relying on a single reduction.

As for credit card rates, Schulz noted that while these rates will “almost certainly decline from record highs in the coming months,” dramatic reductions in credit card bills should not be expected anytime soon. The average new credit card rate in September stood at 24.92%, unchanged from August, marking the highest level since LendingTree began tracking this data in 2019. For a $5,000 balance at this rate, it could take 27 months and $1,528 in interest to repay it.

• If the APR decreases by a quarter-point to 24.67%, repayment would still take 27 months but would result in $1,506 in interest—offering a modest savings of $22.
• A half-point drop to 24.42% would reduce the payoff period by one month, with total interest costing $1,485, leading to a savings of approximately $43 over the term, or $1.50 per month.

Daniel Milan, managing partner at Cornerstone Financial Services, noted that credit card rates are not strictly linked to the Fed’s actions. “Instead, they’re based on lenders’ assessments of risk. If credit risk is rising—evidenced by increasing balances and defaults—then we might find Fed rate reductions without any corresponding dips in APR,” he stated.

Recent government data reveals that credit card debt has escalated to a staggering $1.14 trillion, with 9.1% of credit card balances becoming delinquent in the past year. Meanwhile, personal savings rates have dropped to their lowest in two years. Therefore, rather than depending on falling rates to manage credit card debt, financial experts recommend exploring consolidation options through zero percent balance transfer credit cards or low-interest personal loans.

Auto loan rates are expected to decrease as well, but the savings may not be substantial. Jessica Caldwell from Edmunds mentioned, “A Fed cut might not instantly lead consumers back to the dealerships, but it could encourage some who have been hesitant.” An August survey indicated that 64% of car buyers felt a Fed reduction would influence when they make their next purchase. However, with vehicle costs still high, the market remains strained.

In terms of home affordability, while the Fed does not set mortgage rates directly, these rates generally trend in parallel with Fed decisions. Despite fluctuations influenced by bond market movements and inflation data, Freddie Mac reported the average 30-year fixed-rate mortgage at 6.20%, down from 7.22% in May. It is predicted that mortgage rates will hover between 6% and 6.5%, with some chance of dipping below 6% soon. Nevertheless, these rates remain high compared to previous years, while home prices are still at or near record levels. Financial advisers emphasize that lower rates alone won’t reduce home prices.

For savers, the anticipated decline in interest rates will likely lead to a decrease in yields from savings and CDs, prompting concerns among those used to high interest payouts. Schulz reassured savers that while rates have peaked, it’s still beneficial to explore high-yield savings accounts or CDs before further reductions. “Even with lower rates,” said McBride, “savers who seek the best offers will continue to outpace inflation for the foreseeable future.”

Additionally, for those hesitant to commit funds for extended periods, Milan recommends investing in high-quality, dividend-growth stocks, targeting companies that annually increase dividends by 7-10% to combat inflation.

The stock market has already begun to reflect the potential for lower rates, which typically encourage an increase in stock prices due to lower borrowing costs for companies. The S&P 500 index has recently recorded its best week of the year, with the Dow reaching a record high. Investors are broadening their purchases beyond just major technology stocks to include high-quality dividend stocks in sectors such as utilities, health care, and consumer staples.

In summary, while a rate cut is on the horizon, the direct effects on individual financial situations may not be as pronounced as anticipated.

Source: USA TODAY