NEW YORK (AP) — The Federal Reserve will cut its benchmark interest rate from a 23-year high next month, with consequences for consumers on debt, savings, auto loans and mortgages. Currently, most experts expect the Fed to cut rates by three-quarters of a percentage point in September, November and December, although even deeper rate cuts are possible.
“The time has come” for the Fed to cut interest rates, Powell said Friday in his keynote speech at the Fed’s office in Jackson Hole, Wyoming. “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the allocation of risks.”
Based on Powell’s comments and recent economic data, the central bank is expected to cut its benchmark interest rate by a quarter of a percentage point at its meeting next month and to make further rate cuts in the coming months.
What consumers should know:
According to Greg McBride, chief credit analyst at Bankrate, savers should lock in attractive returns now before the expected interest rate cuts begin.
“Anyone interested in certificates of deposit or bonds should buy now,” he said. “It’s not worth waiting, because interest rates will continue to fall.”
McBride stressed that anyone approaching retirement has a good opportunity to secure savings at the current relatively high interest rates.
“If you do that, you’ll lock in predictable interest income at rates that should well outpace inflation,” McBride said.
“Your credit card bill will not plummet the day after the next Fed meeting,” warns Matt Schulz, chief credit analyst at LendingTree. “Nobody should expect miracles.”
However, the falling federal funds rate will ultimately lead to better terms for borrowers, many of whom are facing the highest credit card interest rates in decades. According to WalletHub’s August Credit Card Landscape Report, the average interest rate is 23.18% for new offers and 21.51% for existing accounts.
Nevertheless, it is “really important that people understand that interest rates are unlikely to fall that quickly,” Schulz said.
He said it’s important to take steps like applying for a 0% interest balance transfer or a low-interest personal loan. You can also call your credit card issuer to see if you can negotiate a better rate.
“In the short term, these things will have a much bigger effect than falling interest rates,” Schulz said.
The Federal Reserve’s benchmark interest rate does not directly set or correspond to mortgage rates, but it does have an influence, and the two “tend to move in the same direction,” said Jacob Channel, senior economist at LendingTree.
He stressed that mortgage interest rates have already fallen in recent weeks in anticipation of the interest rate cut announced by the Fed.
“This shows that mortgage rates can still change even if the Fed does nothing and just keeps rates stable,” Channel said.
Melissa Cohn, regional vice president of William Raveis Mortgage, agreed, saying the most important thing is what signal the Fed sends to the market, not the interest rate change itself.
“I’ve heard from a lot of people who have locked in their mortgage rate over the last 18 months when interest rates were at their peak and have been wondering if it’s time to remortgage and what savings they could make,” she said. “I think the outlook is good and hopefully that will translate into the housing market and we’ll get more buyers into the market.”
Channel said the majority of Americans have mortgages at 5%, so rates may need to fall even further than the current average of 6.46% before many people consider refinancing.
“With auto loans, it’s good news that rates are going to go down, but that doesn’t change the fundamental issues, which is that it’s still very important to shop around and not just accept whatever rate a car dealer offers you at the dealership,” said Bankrate’s McBride. “It’s also very important to save as much as you can and try to put as much down on the car as you can.”
McBride expects the start of rate cuts and the avoidance of a recession in 2024 to lead to lower auto loan rates — at least for borrowers with good credit. For borrowers with worse credit, rates will likely remain in double digits for the rest of the year.
Last week, the government reported that consumer prices rose just 2.9 percent in July from a year earlier, the smallest increase in over three years. But employment data is giving some economists pause for thought. New data shows that far fewer new workers were hired in July than expected and the unemployment rate hit its highest in three years at 4.3 percent – an indicator of a weakening economy. Still, robust retail sales have helped to allay recession fears.
The pace at which the Fed continues its rate cuts after September will depend in part on how inflation and the labor market develop in the coming weeks and months.
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