What another Fed rate cut could mean for consumers
The Federal Reserve may cut interest rates again this week, but the cut may be so small that consumers may not feel it, analysts said.
When the Fed concludes its policy meeting on Thursday, most economists expect the Fed to cut its short-term interest rate by a quarter to between 4.50% to 4.75% . It would be the Fed’s second consecutive rate cut but less than the halving it did in September that kicked off the rate cut.
Consumers and businesses benefit from low interest rates because they allow people to spend and invest more cheaply, but analysts said that until the Fed puts together a slew of rate cuts, many will feel little relief. .
“Consumers are not going to have a big impact on this cover,” said Elizabeth Renter, senior economist at financial resources firm NerdWallet. “It’s an increasingly downward spiral that will slowly ease the financial pressure on households, especially those with debt.”
What can consumers expect this holiday if they buy on credit?
There are still high interest rates on credit cards and personal loans, said Matt Schulz, chief credit analyst at comparison site LendingTree.
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“That’s especially true with store credit cards,” he said. Anyone applying for those types of cards should be prepared for an APR of around 30%, even if you have incredible credit.
Average credit card rates in November fell for the second month in a row to 24.61%, but not far from September’s record 24.92%, according to LendingTree data.
“Unless the Fed accelerates its pace of rate cuts, it will be a while before these cuts add more than a few dollars a month to your debt,” Schulz said.
To illustrate how credit card payments can change with different annual percentage rates (APR), consider if you owe $5,000 on a credit card,
- With an interest rate of 24.61% and monthly payments of $250, it will take 26 months and $1,501 to pay off the balance.
- Lower the interest rate by half a point to 24.11%, and it will take 26 months and $1,459 in interest to pay off the balance. That’s a savings of $42 in interest, or about $1.50 a month.
“Borrowers need to understand that ‘falling interest rates’ is not the same as ‘low interest rates,'” said Greg McBride, chief financial analyst at the rating agency Bankrate. interest is high and will only drop to ‘not high’ when 2024 comes to an end and we enter 2025. It is faster to pay off a higher loan and use 0% or another low rate. Offering cash transfers to turbocharge credit card debt repayments.”
Will mortgage rates go down?
Mortgage rates can be influenced by the Fed’s actions, but they are affected by many other factors such as inflation, borrowing costs, bond yields and risk.
After the Fed cut rates in September by half a percentage point, bond yields rose after strong economic data. Consumer spending, economic growth and even the labor market are doing well.
When the economy is strong, there is little reason for investors to buy safe-haven assets to have their prices fall. Products move in opposite direction of prices.
While the Fed’s quarterly rate cut on Thursday may not strongly influence home buying rates or stimulate the housing market, the long-term outlook for interest rates and credit rates is that they will go down, analysts said.
“Continued contraction could begin to lower mortgage rates, which have remained stubborn,” said Michele Raneri, vice president and head of US research and consulting at credit agency TransUnion. “This could help encourage many potential homebuyers who have been put off by high mortgage rates. It could also start to encourage a recovery market, particularly among those borrowers who have recently taken out a mortgage at a high interest rate.”
Will car loan rates decrease?
While the Fed’s rate cut will confirm the view that auto loan rates will fall, it may take time, analysts said.
So far, “there has been little change in the average rate of auto loans since the Federal Reserve cut rates in September,” said Jonathan Smoke, chief economist at researcher Cox Automotive.
Auto loan rates, like mortgage rates, are also influenced by other factors such as bond yields and delinquency rates.
Delinquency rates on auto loans are set to rise sharply from pre-crisis levels by the end of 2023, after falling to record lows during the COVID-19 health crisis, the Federal Reserve said in September.
As auto loan rates begin to drop significantly, consumers may move to refinance in the coming months, Raneri said.
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Will the stock market rise?
If the Fed commits to further rate cuts to support the labor market, which some economists believe it will, other economists believe the stock market will continue to rise.
“Since the Fed has already drawn a line in the sand at the 4.3% unemployment rate (with its rate cut in half in September), wage growth is likely to remain at 4%, ensuring another year of high-level growth (economy) in 2025,” wrote Steven Ricchiuto, chief economist for the United States at Mizuho Securities USA, in a report.
A stronger economy could generate more revenue for S&P 500 companies, which would boost the company’s earnings and share prices, he said.
Since the overall economic boost benefits all sectors and industries, Ricchiuto said he expects stock market gains to reach more than a few companies next year.
This could be good for 401(k) and other retirement savings, analysts said.
Is it still a saving paradise?
Despite the drop in rates, analysts say savers can still go ahead.
“The fact that interest rates rose in 2022 and 2023 but will take a step downward in 2024 and 2025 is better news for savers than for borrowers,” said Bankrate’s McBride. “Yes, interest rates on savings accounts, money markets, and certificates of deposit will fall, but most products are still outpacing inflation.”
Nerdwallet’s Renter suggests that customers lock in the highest interest rates on certificates of deposit (CDs).
He said: “CDs give you the opportunity to get a higher income if you can put your money where you won’t see it for a period of time.
Since Nov. 1, CD Valet has listed 295 CDs with annual yields of 5% or more across the board.
Medora Lee is a finance, markets, and personal finance reporter for USA TODAY. You can reach him at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for financial tips and business news every Monday through Friday morning.
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