Interest rate cuts are here, but you probably won’t notice for a while

While the cuts signal good news for Americans — reflecting the Fed’s confidence that inflation is finally returning to normal — it will take time for consumers to actually feel the effects of lower rates. That’s because there’s a lag in monetary policy, meaning it could take months for an interest rate cut to materialize for consumers this month. Furthermore, rates for the types of loans most Americans hold are only indirectly affected by the Fed’s moves.

“The interest rate universe is one where the Federal Reserve’s impact varies, but the central bank helps set the tone even where there isn’t a direct correlation,” Mark Hamrick, senior economic analyst at Bankrate, told Business Insider.

Erica Groshen, senior economic adviser at Cornell University and former commissioner of the Bureau of Labor Statistics, said in a statement to Business Insider that lower rates will have at least three kinds of effects: They will reduce the cost of consumer loans, in similarly. make corporate borrowing cheaper and “people living off the interest on their savings will lose some of their income and so can cut back on their spending”.

These effects may not be felt immediately.

One important area where consumers may experience the gap is credit cards. Credit card interest rates are at all-time highs right now – The Consumer Financial Protection Bureau found in a recent report that the average annual percentage rate on credit cards will rise to 22.8% in 2023, nearly doubling in the last decade. Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, told BI that “it will take some time for consumers to realize the benefit” of the discounts.

“A consumer who has a balance will have to pay off the balance they already have at that higher rate before the lower rate will apply to their balance,” Raneri said, meaning consumers with credit card debt will continue to record a high level. rates despite Fed cuts.

Still, Hamrick said that within a day of the Fed’s interest rate cuts, banks will likely adjust their prime lending rates, which will be seen in credit card rates “immediately.”

Fed rate cuts indirectly affect mortgages, which are generally based on other interest rates that are loosely related to the Fed funds rate. Homeowners who already have a fixed-rate loan, which make up the vast majority of the U.S. mortgage market, will not feel the effect of the Fed’s decision unless they refinance to a lower rate or buy a new home. The situation is similar for people who have a fixed rate car loan.

And when it comes to businesses, the rate cuts will have a positive impact on their operations, making it cheaper to borrow. However, they won’t be immune to delay – it will likely take a series of rate cuts from the Fed before businesses can significantly accelerate hiring and investment, as one cut won’t be enough to get them going. changes to their business plans.

Savings rates will also be affected by the Fed’s rate cut decision.

“Getters will continue to be rewarded for looking for the best rates, even if yields fall from the peak,” Hamrick said, adding that “a modest decline in yields is relatively insignificant compared to the decision to bail out.”

Elizabeth Renter, senior economist at NerdWallet, said in a statement that people will see “impacts on the interest rates that banks pay on savings accounts and certificates of deposit.” However, she added that “these cuts work against the consumer”.

“Rates for savings accounts and CDs have been higher than typical in our recent high-rate environment,” Renter said. “As the Fed cuts initially and moves forward, we’ll see banks cut those rates as well.”

At this point, it’s unclear how often and how low the Fed will cut as the year draws to a close. However, it will take time for Americans to see borrowing costs get cheaper, and it may be beneficial for them to take this delay into account before making big financial decisions.

“I would urge people to do the math rather than take some kind of signal like it’s a traffic light and now’s the time to go,” Hamrick said.

Are you planning to go shopping now that the Fed has cut interest rates? How does this affect your financial planning? Share your story with these reporters at [email protected] and [email protected].