How December’s Fed rate cut affects borrowing costs
The Federal Reserve cut its benchmark interest rate by a quarter point at its last meeting of the year.
December’s move marks the third consecutive time the central bank has cut interest rates, with the federal funds rate falling by three-quarters since September to a range of 3.5% to 3.75%.
Outages could impact many of the borrowing and savings rates consumers see every day.
Although the federal funds rate set by the Federal Open Market Committee is the interest rate that banks lend and lend to each other overnight, not the rate consumers pay, the Fed’s actions still affect many types of consumer products.
Most short-term consumer rates are prime rateThis is typically 3 percentage points higher than the federal funds rate. Long-term interest rates are also affected by inflation and other economic factors.
From credit cards and car loans to mortgage rates, student loans and savings accounts, let’s take a look at how a Fed rate cut could affect your finances.
The Fed’s impact on credit card APRs
Most Americans have at least one The majority of credit card and card holders have a month-to-month balance, which means they will pay around 20% interest per year on these short-term loans.
But since the interest rate on credit cards is variable, it has a direct link to the Fed’s benchmark. With a deduction, the interest rate drops, and the interest rate on your credit card debt should follow within one or two billing cycles.
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While a quarter-point change doesn’t mean much when credit card APRs are so high, the collective impact of consecutive cuts can make a noticeable difference, especially when compared to last year’s record-high rates, according to Matt Schulz, LendingTree’s chief credit analyst.
“The reductions could mean savings of hundreds of dollars for borrowers,” he said.
Less impact on mortgage rates
As the yield on 10-year Treasury notes continues to rise amid persistent inflation concerns, the rate on 30-year fixed-rate mortgages has also risen and is now around 6.35%, according to a Dec. 9 report from Mortgage News Daily.
“Given that mortgages are based on 10-year yields, we could see an increase in mortgage interest rates following a disruption as the stock market and investors react,” said Brett House, an economics professor at Columbia Business School.
But since most people have fixed-rate mortgages, their rates won’t change unless they refinance or sell their home and buy another property.
Other mortgages are more closely linked to the Fed’s moves. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust annually, but HELOCs adjust immediately so borrowers may see lower rates.
New vehicle loans may change with interest rate reduction
Beyond mortgage and credit card debt, Vehicle loans also constitute a significant share of household budgets. However, vehicle loan interest rates are fixed and will not adjust to the Fed’s reduction.
Still, those shopping in the market for a car can benefit as prices continue to drop. According to Edmunds, the average auto loan rate for a new car is now down to 6.6%.
But “auto customers still face a tough market, with record-high monthly payments and record loan balances on financed new vehicle purchases,” said Joseph Yoon, Edmunds consumer insights analyst.
Even as the average annual percentage rate (APR) for a new vehicle dropped in November, the average monthly payment for a new car reached an all-time high of $772, according to Edmunds. The average amount financed for a new car also hit a new record, approaching $44,000.
Federal student loans only reset once a year
At a time when there are many student loan debtors While you’re struggling with repayment, there won’t be much relief from interest rate cuts. Federal student loan rates are also fixed for the life of the loan and reset annually for new borrowing, based on May’s 10-year Treasury bond auction.
But if you have a private loan, these loans may be fixed or have a variable interest rate tied to Treasury bill or other rates. As the Fed cuts interest rates, rates on private student loans will also drop over a period of one to three months, depending on the benchmark, according to higher education expert Mark Kantrowitz.
Still, a 25 basis point reduction would reduce monthly loan payments on a 10-year $10,000 loan by about $1.25 per month, Kantrowitz said. “If you add the two previous rate cuts, multiply those numbers by three,” he added. “It doesn’t cover the cost of a cup of coffee.”
Savings rates fall with Fed cut
This is more important than ever Guardians take matters into their own hands. While the central bank has no direct influence on deposit rates, returns tend to be correlated with changes in the target federal funds rate.
On the heels of the Fed’s previous rate cuts, interest on the highest-yielding online savings accounts fell to around 4%, from nearly 5% a year ago, according to Bankrate.
“Savings rates are going to fall even further,” said Stephen Kates, a certified financial planner and financial analyst at Bankrate.
“For people with high-yield savings accounts who want or need a certain rate of return, you have to go all out,” he said.
This could mean locking in a longer-term certificate of deposit, he advised. One-year CDs average 1.93%, according to Bankrate, but the highest-yielding CD rates pay more than 4%.
“If you feel like you’re not keeping up with inflation, it’s definitely time to take action,” Kates said.
The impact of the new Fed chairman
Wednesday’s Fed decision also came under pressure from the President Donald Trump, who has repeatedly argued that interest rates should be significantly lower, has argued that this would make it easier for businesses and consumers to borrow and stimulate the economy.
Trump hinted that he might choose National Economic Council Director Kevin Hassett to replace Fed Chairman Jerome Powell in 2026. Hassett is believed to be in favor of further rate cuts, but has also said he would Don’t bow to political pressure.
“Consumers who are postponing borrowing may find this environment more positive,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “Lower borrowing costs could begin to ease household budgets, provide relief from inflationary pressures and reduce financial stress.”
However, the fact that the Fed continues to ease monetary policy next year does not guarantee that borrowing costs will decrease overall.
“A dovish Fed chair is likely to cause yields to move up rather than down over the medium to long term because it suggests they will be less likely to keep inflation under control,” Columbia Business School’s House said.
“It’s not clear that this economy needs more stimulus in the form of a Fed cut,” he said. “This is not a slam-dunk requirement, especially with inflation still high.”
