Fed rate cuts: Here’s what they mean for personal finance

“The time has come” for the Fed to cut interest rates, Powell said Friday in his keynote speech at the Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

Based on Powell’s remarks and recent economic data, the central bank is expected to cut its key interest rate by a quarter point when it meets next month and make further rate cuts in the coming months.

Here’s what consumers should know:

What would Fed rate cuts mean for savers?

According to Greg McBride, chief credit analyst for Bankrate, savers should be getting attractive returns right now before the expected rate cuts begin.

“For those who might be looking at certificates of deposit or bonds — you want to get into that now,” he said. “There is no benefit in waiting because interest rates will come down.”

McBride pointed out that anyone closer to retirement has a good opportunity to lock in CDs at today’s relatively high rates.

“Doing this will give you a predictable stream of interest income at rates that should beat inflation by a pretty healthy margin,” McBride said.

How would rate cuts affect credit card debt and other loans?

“Your credit card bill won’t go down the day after the next Fed meeting,” warns Matt Schulz, LendingTree’s chief credit analyst. “No one should expect miracles.”

That said, the lower prime rate will ultimately mean better rates for borrowers, many of whom are facing some of the highest credit card interest rates in decades. The average interest rate is 23.18% for new offers and 21.51% for existing accounts, according to WalletHub’s August Credit Card Landscape Report.

Still, “it’s very important that people understand that rates probably aren’t going to come down that quickly,” Schulz said.

He said it’s important to take steps like looking for a 0% interest balance transfer or a low interest personal loan. You can also call your credit card company to see if you can negotiate a better rate.

“In the short term, these things will have a much bigger effect than lowering interest rates,” Schulz said.

What about mortgages?

The Federal Reserve’s benchmark rate doesn’t directly set or match mortgage rates, but it does have an influence, and the two “tend to move in the same direction,” said LendingTree senior economist Jacob Channel.

In recent weeks, mortgage rates have already fallen ahead of the cut predicted by the Fed, he pointed out.

“It shows that even when the Fed does nothing and holds steady, mortgage rates can still move,” Channel said.

Melissa Cohn, regional vice president of William Raveis Mortgage, echoed that, saying the most important thing is the signal the Fed is sending to the market, rather than the change itself.

“I’ve heard from a lot of people who locked in their (mortgage rate) in the last 18 months when rates were at their peak, already wondering if it’s time to refinance and what savings they might have,” she. said. “I think the outlook is good and hopefully that will spill over into the housing market and we’ll get more buyers into the market.”

Channel said most Americans have mortgages at 5 percent, so rates may have to drop further than their current average of 6.46 percent before many people will consider refinancing.

And car loans?

“With car loans, it’s good news that rates will come down, but that doesn’t change the lock-in and the basic approach to things, which is that it’s still very important to shop around and not just accept the rate that a car dealer would offer you at the dealer,” Bankrate’s McBride said. “It’s also really important to save what you can and try to get as much discount on that vehicle as you can.”

McBride predicts that the start of rate cuts and the avoidance of a recession will drive auto loan rates lower in 2024 — at least for borrowers with strong credit profiles. For those with lower credit profiles, double-digit rates will likely persist for the rest of the year.

What is happening to inflation and the labor market?

Last week, the government reported that consumer prices rose just 2.9 percent in July from a year ago, the slowest increase in three years. However, the employment data is giving some economists pause. New data showed that hiring in July was much lower than expected and the jobless rate hit 4.3 percent, the highest in three years – a measure of a weakening economy. That said, robust retail sales helped quell recession fears.

The rate at which the Fed continues to cut rates after September will depend in part on what happens to inflation and the labor market in the coming weeks and months.

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