What Does the Federal Reserve’s Recent Rate Reduction Mean to You?

The recent interest rate reduction, from 2.5 percent to 2.25 percent, by the Federal Reserve doesn’t directly touch any of the everyday interest rates that affect Americans. This quarter-point cut, the first cut in a decade, reduced the federal funds rate, the rate banks and other financial institutions charge one another for very short-term borrowing.

Even though most Americans don’t participate in this type of borrowing, the Fed’s move will still have consequences on the borrowing and saving rates you encounter every day.

Interest rates on car loans, credit card balances, mortgages, etc., and earned interest on the money you save won’t necessarily be directly or immediately impacted. But, consumers could, likely, over time, experience the following trickle-down effects.

Savings Account Rates

Savers have only recently benefited from higher deposit rates – the annual percentage yield banks pay consumers on their money – with several online banks offering over 2.5 percent. However, the recent rate cut will most likely cause these rates to come down.  Now is the time for consumers to shop around for short-term rates or lock in rates with a 1-, 3- or 5-year certificate of deposit with money that doesn’t need to be readily accessible.

Mortgage Rates

According to Bankrate, the current 30-year fixed mortgage rate is about 3.93 percent, the lowest it’s been since November 2016. Because mortgage rates are tied to long-term rates, which move well in advance of any rate changes by the Fed, the current low rate came on the heels of the expectation that the Fed was going to cut rates.  Consequently, unless the Fed hints that more rate cuts are on the horizon, mortgage rates are not expected to fall much more.

With that said, if you borrowed money to purchase a home late last year, when the average 30-year mortgage rate was nearly 5 percent, it may be time to consider refinancing.

Credit Card Interest Rates

The Fed’s recent rate reduction is good news for Americans who carry balances on their credit cards. Because most credit cards have variable interest rates, there is a direct correlation to the Fed’s benchmark rate.

With the rate cut, the prime rate lowers too, and credit card rates will likely follow. For credit cardholders, this means you should see a reduction in your annual percentage yield or APR (the current rates on average are as high as 17.85 percent) within a couple of billing cycles.

With almost half of all credit cardholders in the U.S. holding balances every month, averaging approximately $1,150 in interest yearly, this quarter-point reduction will create some savings.

Auto Loan Rates

For those of you who are planning to purchase a new vehicle, the Fed’s rate reduction will most likely have little impact on your car payment. However, this rate cut lowers the financing costs for car manufacturers and dealers, which can offer a better negotiating position for the would-be car buyer.

Student Loan Rates

While most student loans are fixed-rate federal loans, approximately 1.4 million students in the U.S. today use private student loans. Private loans can be fixed or have a variable rate tied to the Libor, prime or T-bill rates. Consequently, the Fed’s rate cut means borrowers with variable rate loans will likely pay less interest. If you have private, variable rate loans, you should look into refinancing to possibly lock in a lower fixed rate.

However, as borrowers begin to celebrate this recent rate cut, retirees have begun to worry. This type of rate reduction doesn’t bode well for returns on investments preferred by those who’ve left or have immediate plans to leave the workforce.

Typically, yields on fixed annuities, CDs, savings accounts and bonds go down with a Fed rate cut. Long-term care premiums and pensions will also be pinched. The impact will likely not be felt immediately. Retirees’ portfolios may not feel a hit for more than a year.

Investment professionals warn retirees not to chase returns in the market, possibly placing more emphasis in their portfolio on investments like equities and real estate, which might not be safe for those who have a lot more to lose and generally can’t afford to take on much risk. With any rate fluctuation, it’s important to work with your financial advisor or planner to develop a portfolio that’s right for your situation.

Although the Federal Reserve’s recent rate cut can be viewed as both a good thing and a bad thing, the same as any rate increase, the guiding force behind the reduction is heading off a recession. With this move, the Fed hopes to prevent the economy from weakening and forestall layoffs and other economic damages that could adversely affect everyone.

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