How Will a Fed Interest Rate Cut This Week Affect Your Finances?

How Will a Fed Interest Rate Cut This Week Affect Your Finances?

If the Federal Reserve decides to cut interest rates this week, it’s unlikely to drastically change your financial situation, experts suggest.

For the first time in four years, the Fed is expected to reduce its short-term federal funds rate at its policy meeting this Wednesday. While most economists agree that a rate cut is coming, the actual reduction—whether it’s a quarter or a half-percentage point from the current 5.25% to 5.50%—is still up for debate.

But don’t expect immediate changes in your daily financial life. Banks and lenders tend to be slow in reducing the interest rates they charge borrowers, even when the Fed lowers its rates. On the flip side, they are quick to cut the rates they pay on savings accounts, certificates of deposit (CDs), and other savings vehicles.

According to Matt Schulz, a credit analyst at LendingTree, "While lower rates can help people struggling with debt, this one cut won’t have a significant impact on most people's finances." Schulz emphasizes that the best way for individuals to reduce interest on their loans is by taking proactive steps, like paying down debt or negotiating better terms.

Greg McBride, chief financial analyst at Bankrate, believes that the real impact will be felt after several rate cuts over time, not just from this single reduction.

Will Credit Card Rates Drop?

Yes, credit card rates are expected to fall, but don’t hold your breath for massive reductions in your credit card bills. Schulz mentions that while rates will come down from record highs, it won’t be an immediate or dramatic change. For instance, the average new credit card rate in September was 24.92%, unchanged from August. This is the highest rate since 2019, when LendingTree began tracking these numbers.

To put this into perspective: if you have $5,000 in credit card debt at a 24.92% APR and you pay $250 a month, it’ll take 27 months and $1,528 in interest to pay it off. A quarter-point rate drop would only save you about $22 over the same period, while a half-point cut could reduce the payoff time by one month and save around $43 in interest.

But as Daniel Milan of Cornerstone Financial Services points out, banks often set their credit card APRs based on their own assessments of risk, which means even if the Fed lowers rates, credit card rates might stay the same or even increase if banks perceive a rise in credit risk.

What About Auto Loans?

Auto loan rates may decrease slightly, but don't expect a huge difference. Jessica Caldwell, head of insights at Edmunds, notes that while a Fed rate cut might not send consumers rushing back to car dealerships, it could nudge hesitant buyers. According to a recent Edmunds survey, 64% of potential car buyers said a rate cut would influence when they purchase their next vehicle. However, high vehicle costs are still a big hurdle.

Caldwell also reminds consumers that getting approved for an auto loan and keeping up with payments are key factors, regardless of rate cuts.

Will Home Buying Get Cheaper?

The Fed doesn’t directly control mortgage rates, but mortgage rates tend to follow the Fed’s moves. Currently, mortgage rates fluctuate based on market conditions like inflation and bond yields. As of early May, the average 30-year fixed-rate mortgage was around 6.20%, down from 7.22% earlier this year.

While mortgage rates might dip below 6% in the coming weeks, they’re still significantly higher than they’ve been for most of the past decade. In addition, high home prices in many markets mean that lower rates won’t necessarily make homes more affordable.

How Are Savers Affected?

For savers, the bad news is that interest on savings accounts and CDs is expected to drop as soon as the Fed cuts rates. However, Greg McBride advises that there’s no need to panic. Even though rates are falling, people who shop around for competitive savings rates can still earn returns that outpace inflation.

Daniel Milan suggests another option for savers who want better returns: investing in high-quality dividend growth stocks. These stocks, which grow their dividends by 7-10% annually, could help beat inflation over time.

What About the Stock Market?

The stock market has already been reacting positively to the expectation of lower rates. Lower interest rates usually boost stock prices because they make borrowing cheaper for businesses, allowing them to invest more in growth. The S&P 500 recently had its best week of the year, and the Dow Jones hit a record high.

Investors are expanding their focus beyond big tech companies like Apple, Amazon, and Microsoft, and buying stocks in industries like healthcare, real estate, and consumer goods. This broader investment approach is considered a healthy sign for the market, according to Milan.

Overall, while a Fed rate cut might offer some short-term relief for borrowers, its long-term effects on savings, loans, and the stock market will depend on additional rate changes and broader economic conditions.