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Subscribe18 SEP 2024 / FINANCE
After years of steadily raising interest rates to combat inflation, the Fed is now shifting gears. But the big question loomed: Would they opt for a half-point cut or play it safer with a quarter-point reduction? Economists were split, and millions of Americans were waiting anxiously for the outcome. In the September 18th meeting, the answer finally came.
The Federal Reserve’s policy-setting committee took a decisive step, cutting the federal funds rate by 50 basis points—a bolder move than many expected. With debate swirling around a 25 or 50 basis-point reduction, this marks the first rate cut since March 2020. The new rate range, now 4.75% to 5%, is a sharp drop from the previous 5.25% to 5.5%, the highest rates seen since 2001. This decision will ripple through the economy, lowering borrowing costs while signaling the end of the recent era of attractive high-yield savings accounts.
Whether a small cut or a more significant one, the Fed's first rate drop is expected to bring some much-needed relief to consumers. This is good news if you're in the market for a home, thinking of buying a car or dealing with $1.1 Trillion credit card debt. It's also likely the start of more rate reductions through the rest of the year and into 2025, which could lead to lower mortgage and auto loan rates. But there's a flip side—savers might see those attractive high returns start to dwindle.
"It’s been a long run, and the Fed feels it's time to start lowering interest rates again," says Sara Rathner, co-host of the Smart Money podcast and personal finance expert at NerdWallet. "Consumers are feeling the squeeze, hit by both rising interest rates and inflation."
Rathner also points out that this week's rate cut is "a chance for people to take stock of their finances and save some money on their borrowing."
The Fed's next big meeting is happening from September 17-18, with their much-anticipated rate decision set to be announced at 2 p.m. Eastern on the 18th. Shortly after, at 2:30 p.m. E.T., Fed Chair Jerome Powell will hold a press conference to break down the central bank's economic outlook.
Powell has hinted that the Fed is ready to lower its benchmark rate. During a speech in August, he mentioned that "the time has come" for the Fed to shift its monetary policy, especially with inflation dipping below 3% and signs of some softening in the job market.
The big question on everyone's mind is how much the Fed will cut rates. Some experts are betting on the usual 0.25 percentage point reduction, while others think a bigger 0.5-point cut might be in the cards. Either way, borrowers will see some relief, but it's likely to be modest, especially since the current Fed funds rate sits between 5.25% and 5.5%. A 0.25-point cut would bring it down to 5% to 5.25%, trimming borrowing costs just a little.
"One rate cut alone isn't a paradigm shift for borrowers dealing with high financing costs—it won’t make a huge difference in the household budget," says Greg McBride, chief financial analyst at Bankrate. "What really matters is the cumulative impact of several cuts over time."
Yes, it looks like more rate cuts are on the horizon. Economists surveyed by FactSet are expecting the Fed to lower rates at both the November and December meetings (there’s no meeting in October). Many experts also believe the Fed will keep cutting rates through 2025, with the benchmark rate likely dropping to somewhere between 3% and 3.5% by May 2025.
Goldman Sachs analysts noted in a September 15 research report, "Our baseline forecast is for three consecutive 25 basis point cuts in September, November, and December, with an eventual terminal rate of 3.25%-3.5%."
Mortgage rates have spiked alongside the Fed’s rate hikes, with the 30-year fixed-rate mortgage climbing above 7% in 2023, making homebuying tougher for many. As home prices keep rising, that combination pushed ownership out of reach for a lot of would-be buyers.
However, mortgage rates have already started to dip ahead of the Fed’s September 18 decision, fueled by expectations of a rate cut and weaker economic data. The current 30-year fixed mortgage rate is around 6.29%, the lowest it’s been since February 2023, according to the Mortgage Bankers Association.
Homeowners paying over 7% on their mortgage might also want to think about refinancing at a lower rate. For instance, refinancing a $400,000 mortgage at today's 6.3% rate, compared to the peak of around 7.8% in 2023, could save about $400 a month. "Lenders generally recommend refinancing if the difference is at least 1 percentage point," notes Sara Rathner from Smart Money.
Auto loan rates are expected to dip after the Fed's rate cut, which might encourage more people to start car shopping. Edmunds reports that 6 in 10 potential buyers have delayed purchasing due to high rates. Currently, the average APR is 7.1% for new cars and 11.3% for used ones. While a rate cut won’t flood showrooms instantly, it could help nudge buyers, especially with year-end car sales and promotions, says Jessica Caldwell from Edmunds.
Credit card rates, which have been at record highs, may also decrease slightly, but the savings for those carrying balances will be minimal. Matt Schulz from LendingTree estimates that someone with a $5,000 balance and a 24.92% APR might save less than $1 per month with a small rate cut. Instead, experts recommend paying off debt or seeking a 0% balance transfer card or a personal loan with a lower interest rate.
Fed rate hikes have been great for savers, with some banks offering high APYs—up to 5%—on CDs and high-yield savings accounts. But with the rate cut, those days may be winding down, says Matt Schulz.
While rates might drop slightly, there’s still time to benefit from high returns. "Don’t expect rates to plummet right away," Schulz says. However, some experts predict savings account rates could decrease by as much as 0.75 percentage points.
As the Fed prepares for more rate cuts, here's what you can expect: Mortgage rates may drop slightly, but experts believe they’ll hover around current levels through the end of the year, giving homebuyers more opportunities as housing affordability improves. Auto loan rates could dip, encouraging car shoppers, though the impact might not be immediate. Credit card rates may see minimal reductions, but for those carrying balances, the savings will be barely noticeable. Instead, consider paying down debt or finding a 0% balance transfer card.
On the flip side, savers might see high APYs on savings accounts and CDs start to decline. While rates won’t fall off a cliff, now is a good time to lock in rates or move funds into high-yield accounts. The overall financial environment will shift gradually, with significant impacts emerging over time as the Fed continues its rate cuts.
Long-term planning: Help clients understand that while one rate cut offers modest relief, the cumulative effect of multiple cuts over time will have a greater impact on their borrowing and saving. Stay tuned for more updates, and don't forget to subscribe to our newsletter for a weekly dose of news and more!
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