NEW YORK (AP) — Federal Reserve System lowered the base interest rate Wednesday was the second time since September that the difference was a quarter of a point. Before that, I hadn’t had a haircut for nine months.
The federal funds rate is the interest rate at which banks lend and borrow from each other. Although the interest rate that consumers pay to borrow money is not directly related to this rate, changes can affect the amount you pay on credit cards, car loans, mortgages, and other financial products.
“While the full economic impact of such a move will become clearer over time, early indicators suggest that even modest rate cuts could have meaningful consequences for consumer behavior and financial health,” said Michele Ranelli, vice president and head of U.S. research at credit reporting firm TransUnion.
The Fed has two goals when setting interest rates. The first is to control the prices of goods and services, and the second is to promote full employment. Typically, the Fed raises interest rates to reduce inflation and may lower them to encourage faster economic growth and job growth. The current challenge is inflation rate increases Although higher than the Fed’s 2% target, The job market is depressed. The government shutdown also prevented the Fed from collecting and publishing the data it relies on to monitor the health of the economy.
Still, the Fed is expected to cut rates once again before the end of the year.
Here’s what you need to know:
Interest on savings accounts becomes less attractive
For savers, lower interest rates will gradually erode the attractive yields currently offered by certificates of deposit (CDs) and high-yield savings accounts.
According to Ken Toomin, founder of DepositAccounts.com, three of the top five banks for high-yield savings accounts have cut interest rates since the Fed’s last rate cut in September, while two of the five largest banks (Ally Bank and Discover/Capital One Bank) have lowered interest rates on savings accounts. Currently, the maximum interest rate for high-yield savings accounts is around 4.46% to 4.6%.
These are still better than recent trends and are a good option for consumers looking to make a profit. money profit They may want to access it in the near future. High-yield savings accounts typically have a much higher annual yield than traditional savings accounts. The national average for traditional savings accounts is currently 0.63%, according to Bankrate.
There may be some accounts that will achieve a return of about 4% by the end of 2025, Toomin said, but the Fed’s rate cuts will be focused on those products, pushing average yields lower.
Interest rate cuts will gradually affect mortgages
For those looking to buy a home, the market is already pricing in lower interest rates.
“Mortgage rates, in particular, are reacting quickly,” Ranelli said. “Just last week they found themselves in their shoes. Lowest level in a year. Mortgage rates do not always move in lockstep with the Fed’s target rate and often factor in expected future rate cuts, but if monetary policy continues to be accommodative, rates could fall further. ”
Bankrate financial analyst Stephen Kates said the lower interest rate environment will provide some relief to borrowers over time.
“Whether you’re a homeowner with a 7 percent mortgage or a recent graduate looking to refinance student loans or credit cards, lower interest rates can ease the burden on heavily indebted households by opening up refinancing and consolidation opportunities,” he said.
Auto loans are not expected to decline anytime soon
Americans faced Soaring car loan interest rates Interest rates have risen over the past three years since the Fed raised its benchmark rate starting in early 2022. Interest rates are expected to fall soon. Analysts say the cuts will help provide eventual relief, but it could take time to materialize.
“If the auto market starts to freeze and people stop buying cars, loan margins may start to shrink, but auto loan rates won’t move in tandem with the Fed rate,” Cates said.
New car prices are not adjusted for inflation and remain at historically high levels.
Typically, annual interest rates on auto loans range from about 4% to 30%. According to Bankrate’s latest weekly survey, the average interest rate on auto loans is currently 7.10% for a 60-month new car loan.
Credit card interest rate relaxation may be delayed
interest rate of credit card With current interest rates averaging 20.01%, those with large amounts of credit card debt may be slow to feel the Fed’s interest rate cuts. Still, the cuts are good news.
“Inflation continues to weigh on household budgets, but rate cuts could be offset by lowering debt service costs,” Ranelli said.
Still, the best thing for everyone is have a large credit card balance Prioritize paying off high-interest debt and move to a credit card with a lower annual interest rate whenever possible, or negotiate directly with your credit card company for more flexibility.
___
The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. This independent foundation is separate from Charles Schwab and Co. Inc., and The Associated Press is solely responsible for its journalism.
