Rate Revelation: How the Fed’s September Cut Will Impact Your Bottom Line

Rate Revelation: How the Fed’s September Cut Will Impact Your Bottom Line

Fed Slashes Interest Rates, Impacting Multiple Sectors of the US Economy

The Federal Reserve lowered interest rates by a half point on Wednesday, setting off a chain reaction that will indirectly influence several parts of the U.S. economy, including your wallet.

The Unprecedented Move

Ahead of the announcement, it was unclear if the Fed would cut rates by 25 or 50 basis points, but officials ultimately chose the bolder path. It’s likely an indication of some concern about weaker economic data and rising unemployment, though for some analysts the move came as a surprise.

Savers

While high interest rates have been a pain in many areas of people’s finances, they’ve been a boon for savers. That’s because when benchmark interest rates are high, so are the annual percentage yields (APYs) on deposit accounts like money market accounts, high-yield savings accounts, and certificates of deposit (CDs).

With money market and high-yield savings accounts, banks can change the APY whenever they want on the money that’s already deposited in the account. The rates on these accounts are typically quickest to change when the Fed makes adjustments and are effective immediately.

On the other hand, you can lock in your rate with CDs, earning fixed interest on your deposit for a term usually between three months and five years. Lawrence Sprung, founder and wealth advisor at Mitlin Financial, previously told Money that CD rates tend to change seven to 10 days after the Fed changes rates, giving you a small window of time between now and roughly the end of September to lock in your rate.

Homeowners

According to Freddie Mac’s economic outlook, the average interest rate on outstanding (existing) mortgages is 4.1%. Meanwhile, someone considering refinancing their current loan is looking at a mortgage rate above 6%. The rate discrepancy has left many homeowners feeling trapped: It doesn’t make financial sense to sell their current home and buy a new one at a higher rate unless some kind of life event forces the issue (think: a new job or a divorce).

Alas, with the Federal Reserve only having announced one rate cut so far, the effect on mortgage rates may not be enough to move the needle significantly on home sales.

High rates over the last few years have also impacted a homeowner’s ability to refinance their homes. Freddie Mac reports that the level of refinancing activity during the first half of this year is at the lowest level since 1995, as rate and term refis simply aren’t attractive to most mortgage holders. However, the rate cut does mean that more people who purchased property at higher rates within the past year and a half could soon benefit from lower rates.

Homebuyers

The pandemic provided a once-in-a-lifetime opportunity for buyers. Record-low mortgage rates meant homeowners could trade up to bigger and more expensive homes, while first-time buyers suddenly found themselves able to afford homes sooner than planned. But in 2022, mortgage rates started to rise, and they continue to stay well above the rates seen during the COVID-19 crisis. The result has been a tough hurdle for homebuyers to overcome, with the average buyer now priced out of the market.

Although a rate cut by the central bank will help keep mortgage rates moving lower, buyers are more likely to see a gradual improvement than an immediate one.

Job-seekers

The central banking system is largely known for its ability to hike or cut benchmark interest rates in an effort to control prices, but the Fed has another key mandate: to make sure the labor market is running smoothly. The unemployment rate remains low by historical standards at 4.2%, but its rise from the 2023 low of 3.4% has become a concern for the Federal Reserve.

For years, the Fed has been laser-focused on getting inflation under control. Now that’s largely been achieved, the rate cut announced Wednesday is a reflection of the agency’s commitment to the other arm of its economic scale — the job market.

Given that rate hikes typically damper the labor market, some economic experts say rate cuts could have the opposite effect. “By lowering interest rates, we could lower borrowing costs, encourage businesses to expand and hire more workers,” wrote researchers at the Roosevelt Institute, a liberal think tank.

Investors

For those whose investment horizons permit for market volatility, it’s once again time to consider higher-risk assets like stocks and ETFs. From March 2022 to July 2023, the Fed’s rate-hiking policy made low-risk assets — like bonds, Treasury bills, CDs, and other cash alternatives — nearly as appealing as the equities market. But with the central bank enacting its first cut to the effective federal funds rate, safe-haven assets and high-yield savings products where investors have been stashing cash will begin to lose their appeal.

Fed Chair Jerome Powell explained at a recent news conference that rate cuts can lead to stronger economic growth and inflation as lower borrowing costs boost consumer and business spending. He noted that the rate cut was “motivated by a desire to support the economy’s continued growth” and to “help our economy get back to a sustainable path.”

Borrowers

Interest rates for personal loans and credit cards soared in 2022 when the Fed hiked rates. These rates have been especially painful for consumers because many are relying more on credit cards to cope with high prices after several years of inflation. Americans paid over $100 billion in credit card interest in 2022, and total balances have surpassed $1 trillion.

The average credit card APR reached a record high last year of about 23%. Credit card APRs should finally decrease now that the Fed is cutting benchmark rates, but just how much is unknown. Setting aside the increase in the prime rate, lenders have also “quietly and steadily” increased their profit margins on credit cards over the past decade, according to the Consumer Financial Protection Bureau. Hopefully, some relief is coming for cardholders, but many banks will likely continue to set high APRs even if the Fed enacts multiple rate cuts.

Drivers

Auto loan rates, like mortgage rates, are heavily dependent on the federal funds rate. With auto loan rates averaging 9.7% for new vehicles and 13.9% for used vehicles, car buyers have been committing to record-high monthly payments, while other shoppers have delayed purchases.

Rates should finally come back down as the Federal Reserve enacts cuts: “Once the fed funds rate is headed for neutral, the average rate on new auto loans is likely to end up between 7.5% and 8%,” Cox Automotive wrote in a recent report.

Officials have argued that high interest rates helped halt runaway inflation in car prices. As auto loan rates more than doubled due to rate hikes, the demand for new vehicles cooled and prices for new vehicles flattened out while used car prices actually fell significantly. If more car buyers start shopping again as interest rates come down, it wouldn’t be surprising to see car prices resume their normal rate of growth.

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