Federal Reserve interest rate cut: what to expect
The Fed is expected to cut borrowing costs again on Wednesday.
Another quarter-point cut, following September’s cut, would bring the federal funds rate to a range of 3.75%-4.00%.
The federal funds rate, set by the Federal Open Market Committee, is the interest rate at which banks lend money to each other overnight. While that’s not the rate consumers pay, the Fed’s moves have a trickle-down effect on many types of consumer loans.
The FOMC also set expectations for another rate cut in December, but the path forward is unclear. President Donald Trump, who has said a replacement for current Federal Reserve Chairman Jerome Powell could arrive by the end of the year, has repeatedly weighed in on Fed policy, arguing that interest rates should be reduced sharply.
It’s not clear that rates will continue to fall, and even if they did, not all consumer products are equally affected.
‘The Fed does not reduce every interest rate’
When the Fed raised interest rates in 2022 and 2023, interest rates on most consumer loans quickly followed suit. While this is the second rate cut in a row, most These consumer rates are likely to remain higher for now.
“The Fed is not cutting every interest rate in the world,” said Mike Pugliese, senior economist at Wells Fargo Economics.
Depending on their duration, some borrowing rates are more sensitive to Fed changes than others, he said: “At one end of the spectrum you have shorter floating interest rates, and at the other end you have 30-year fixed-rate mortgages.”
These short-term rates are more closely pegged. prime rateThis is the rate banks offer to their most creditworthy customers; It is typically 3 percentage points higher than the federal funds rate. Long-term interest rates are also affected by inflation and other economic factors.
Credit cards ‘won’t go from terrible to great overnight’
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According to Bankrate, almost half A majority of American households have credit card debt and pay interest on average more than 20% of their revolving balance; This makes credit cards one of the most expensive ways to borrow money.
Since most credit cards have a short-term, variable interest rate, there is a direct link to the Fed’s benchmark.
When the Fed lowers rates, the interest rate also decreases, and the interest rate on your credit card debt will likely adjust within a billing cycle or two. But even then, credit card APRs will only moderate the extremely high levels. And issuers in general have kept their rates somewhat higher to reduce their exposure to riskier borrowers.
“Even if the Fed steps up the pace when it comes to rate cuts in the coming months, credit card rates won’t go from abysmal to incredible overnight,” said Matt Schulz, chief credit analyst at LendingTree.
For example, if you have $7,000 in credit card debt on a card with a 24.19% interest rate and you’re paying $250 a month on that balance, lowering the APR by a quarter point will save you about $61 over the life of the loan, according to Schulz.
Light benefit for car and home buyers
The average rate on a five-year new car loan is currently around 7%. Going forward, “a modest Fed rate cut won’t significantly reduce consumers’ monthly payments, but it will boost overall buyer sentiment,” Edmunds chief insights officer Jessica Caldwell previously told CNBC.
Long-term loans, such as mortgages, are less affected by the Fed. Both 15- and 30-year mortgage rates are more closely linked to Treasury yields and the economy.
Still, experts say expectations of more disruptions on the way could put downward pressure on mortgage interest rates, which “could encourage more Americans to consider getting back into the housing market after being on the sidelines for so long,” according to LendingTree’s Schulz.
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 HELOC adjusts immediately.
