Federal Reserve Expected to Lower Interest Rates for Third Consecutive Quarter Point
The Federal Reserve is expected to lower interest rates by another quarter point on December 18, marking the third rate cut since September. This would bring the total reduction to a full percentage point. The move comes as the central bank recalibrates its policy after a swift rate hike cycle caused by inflation reaching a 40-year high.
The rate cut could lower the federal funds rate to a range of 4.25% to 4.50%, exerting some easing of financial pressure. However, the effects on consumer borrowing costs will not be uniform. While some interest rates will fall, others will remain unaffected or not yet influenced by the central bank’s moves.
Credit cards, for instance, have a direct connection to the Fed’s benchmark, and most credit card rates have risen from 16.34% in March 2022 to 20.25% today. Even with rate cuts, credit card interest rates have barely budged. A better move for those with credit card debt is to switch to a 0% balance transfer credit card and aggressively pay down the balance.
Mortgage rates are fixed and tied to Treasury yields, so they are not falling in step with Fed policy. As a result, most homeowners with fixed-rate mortgages will not be affected. Those who want to refinance or buy a new home may see slightly lower rates, but it’s hard to predict.
Auto loans are fixed, and most borrowers are now paying larger monthly payments due to rising car prices. The average rate on a five-year car loan is around 7.59%, and a rate cut will not significantly change the monthly payment.
Student loans are fixed, but private student loans may be affected by a rate cut. Borrowers with variable-rate private student loans may be able to refinance into a less-expensive fixed-rate loan, but this would mean forgoing protections offered by federal loans.
Meanwhile, savings rates tend to be correlated to changes in the target federal funds rate. The top-yielding online savings accounts have offered the best returns in decades and still pay nearly 5%. Despite the expected rate cut, this is still a good time to be a saver.