Impact of Fed’s First Rate Cut in 4 Years on Your Finances Explained

A significant shift is anticipated in the financial landscape as the Federal Reserve approaches its first interest rate cut in over four years. Scheduled for September 18, this decision could have lasting effects on the finances of millions of Americans.

The Fed is widely expected to lower its benchmark rate, which is currently at its highest level in 23 years. Following a series of rate hikes aimed at controlling the pandemic-induced inflation, economists are divided on whether the rate reduction will be 0.25 percentage points or a more substantial 0.5 percentage points, according to financial data firm FactSet.

Many consumers will welcome this move, especially those looking to make home or auto purchases or managing credit card debt. Experts suggest this rate reduction might trigger a series of additional cuts later this year and into 2025, potentially impacting mortgage and auto loan rates significantly.

Sara Rathner, a personal finance expert for NerdWallet, expressed that consumers have been feeling the financial squeeze with the combination of rising interest rates and inflation. “It’s been a long marathon — the Fed feels it’s time to lower interest rates again,” she said. She emphasized that this rate cut presents an opportunity for consumers to reassess their finances and reduce some of their borrowing costs.

The impending meeting of the Federal Reserve in September is crucial, with members meeting from September 17-18. The rate decision will be announced in the afternoon, followed by a press conference where Chair Jerome Powell will provide insights into the central bank’s economic outlook.

In a recent speech, Powell indicated that it may be time for the Fed to adjust its monetary policy as inflation dropped below 3% annually, compounded by indications of labor market weakness.

Debate persists among economists regarding the precise size of the rate cut. Some are leaning toward a typical reduction of 0.25 percentage points, while others anticipate a notable reduction of 0.5 percentage points. Even with a cut, borrowers may not experience dramatic relief since the current Fed funds target range is between 5.25% and 5.5%.

Greg McBride, chief financial analyst at Bankrate, pointed out that a single rate cut may not significantly alleviate the high financing costs faced by borrowers. Instead, he noted that the cumulative effects of a series of reductions will carry more weight for household budgets.

Looking ahead, many economists predict additional cuts in November and December, with expectations that the Fed will continue to lower rates throughout 2025. Forecasts suggest that by mid-2025, the benchmark rate will settle between 3% and 3.5%.

The anticipated rate cuts could offer relief to those looking for mortgages. Mortgage rates have soared alongside the Fed’s hikes, with the 30-year fixed-rate mortgage recently exceeding 7%. This surge has made home buying unaffordable for significant numbers of potential buyers, particularly as housing prices continue to rise.

In advance of the Federal Reserve’s September decision, mortgage rates have begun to decline, currently averaging around 6.29% — the lowest figure since February 2023. However, experts caution that further significant drops following the rate cut may be limited, especially if economic conditions remain robust. Even so, this environment could create an opportunity for previously hesitant homebuyers, as housing affordability appears to improve along with an uptick in inventory.

Homeowners with mortgages above 7% might also find refinancing into lower rates advantageous. For example, a $400,000 mortgage refinanced from a 7.8% rate to approximately 6.3% could save around $400 a month.

As for auto loans, a rate cut is expected to prompt reductions, potentially encouraging consumers to resume vehicle shopping. Many car buyers have postponed purchases due to high financing rates, currently averaging 7.1% for new cars and 11.3% for used cars.

Additionally, high credit card rates are likely to decrease with the Fed’s cut, but the effect may not be substantial for borrowers carrying balances. Analysts suggest that individuals with outstanding debt should focus on repayment strategies rather than relying on rate cuts for relief.

On the savings front, while some consumers have benefited from high rates on CDs and high-yield savings accounts, this trend may face a downward shift in the wake of rate cuts. Experts recommend that savers consider transferring their funds to high-yield accounts while securing current rates through CDs before anticipated reductions take hold.

In conclusion, the upcoming Federal Reserve rate cut is poised to initiate changes in borrowing and saving conditions for consumers, potentially steering the economy towards more favorable lending scenarios.

Source: CBS News