The Federal Reserve is expected to cut interest rates next week, which is good news for families struggling with high living costs. However, economists caution that a rate cut by the Federal Reserve may not immediately alleviate financial pressures.
Columbia Business School economics professor Brett House told CNBC, “Consumers should be pleased with the rate cut, but it will not bring significant immediate relief.”
According to the FedWatch indicator from the Chicago Mercantile Exchange Group, the market anticipates the Fed to begin cutting rates at its September 17-18 meeting, with the possibility of more substantial cuts later in the year.
The benchmark interest rate set by the Federal Reserve impacts all borrowing and savings rates in people’s lives, including credit cards, mortgages, and car loans.
Greg McBride, Chief Financial Analyst at Bankrate.com, also noted that the initial rate cut by the Fed is expected to be modest at 0.25%, which means the impact will be “very small.”
McBride added, “What borrowers can look forward to is a series of rate cuts that will cumulatively have a meaningful impact on borrowing costs, but it will take time. A single rate cut is not a cure-all.”
Some experts estimate that the federal funds rate could drop below 4% by the end of 2025 from the current range of 5.25% to 5.50%.
When the Fed cuts rates, annual percentage rates on credit cards will begin to decrease.
McBride emphasized that even with the rate cut, rates are only coming down from extremely high levels, and it will take a considerable amount of rate cuts to see significant reductions. For example, going from 20% to 19% would require a long path of rate cuts, and a 19% credit card rate is still much higher than it was three years ago.
During this rate-hike cycle, the average credit card rate has risen from 16.34% in March 2022 to over 20% currently, nearing historic highs.
McBride advised actively paying off credit card debt and utilizing 0% balance transfer credit cards.
Mortgage rates have started to decline, mainly due to the economic slowdown prompted by the Fed. The rates on 15-year and 30-year fixed-rate mortgages are tied to Treasury yields and the economy to some extent, influenced by Federal Reserve policies.
As of September 11, the average rate for a 30-year fixed-rate mortgage loan had dropped by nearly a percentage point from May, standing at around 6.3%, according to the Mortgage Bankers Association.
Jacob Channel, Senior Economist at LendingTree, mentioned that while mortgage rates are decreasing, many areas still have high or near-historic property prices, presenting challenges for homebuyers.
“This rate cut will not completely reshape the economy, nor will it make buying a home or repaying debt significantly easier,” he said.
Car loans, similar to mortgages, will not see immediate effects on vehicle purchases or the automotive market with the Fed’s initial rate cut.
“No one is going to upgrade from a compact car to an SUV just because of a 0.25% rate cut,” McBride emphasized. For a $35,000 loan, a 0.25% decrease would only amount to a $4 monthly reduction.