The Federal Reserve (Fed) announced on Wednesday, October 29th, that it will cut its benchmark interest rate by 25 basis points to a target range of 3.75% to 4.00%. This marks the second rate cut by the institution this year. The decision is expected to have a ripple effect on the credit cards, mortgages, car loans, and savings accounts of millions of American households.
The Fed’s rate cut was largely anticipated by the market. The primary purpose of this move is to provide preventative support in the face of key economic data missing due to the government shutdown, economic growth uncertainties, particularly with signs of softness in the labor market.
Prior to this announcement, President Donald Trump had been pressuring Jerome Powell, the Chairman of the Federal Reserve, to significantly lower interest rates to stimulate the economy.
Mark Zandi, Chief Economist at Moody’s, pointed out that for many financially strapped Americans, this rate cut is expected to alleviate some of the high borrowing costs because “many people are borrowing to supplement their income and paying interest on these debts.”
The Fed’s actions impact the prime lending rate between banks (typically 3 percentage points higher than the federal funds rate), indirectly or directly affecting consumers. Specifically:
Credit card debt:
It has a direct but limited effect. Since most credit cards have variable interest rates, their rates will adjust in the next one to two billing cycles. However, with the average credit card annual percentage rate (APR) still above 20%, the 25 basis point rate cut will not have a significant impact in terms of interest savings.
Experts estimate that for a $7,000 credit card debt, the savings could be only a few tens of dollars a year.
Home mortgages:
These long-term loans are less affected by the Fed’s policy. The interest rates for 15-year and 30-year mortgages are fixed during the loan term, so most homeowners will not immediately feel the impact of the rate cut. Mortgage rates are closely related to government bond yields and the economic situation. However, if the market expects future rate cuts to exert downward pressure on mortgage rates, homebuyers may still benefit.
Experts predict that with a 25 basis point rate cut, a $350,000 mortgage could potentially reduce monthly payments by nearly $150.
Adjustable rate loans:
Adjustable rate mortgages (ARMs) and Home Equity Lines of Credit (HELOCs) linked to the prime rate are subject to quicker adjustments.
Car loans and student loans:
Indirect impact is predominant. Car loans: as most are fixed-rate, the recent rate cut will have a minimal effect on monthly payments. However, analysts believe that the rate cut could boost consumer confidence and prompt lending institutions to offer more attractive financing deals by year-end.
Federal student loans:
The rates are fixed, with new loan rates resetting yearly on July 1st, so most borrowers will not immediately feel the impact of the rate cut. However, borrowers with variable rate private student loans will automatically benefit.
Savings rates:
The last chance to secure high rates. For savers, the Fed’s entry into a rate-cutting cycle means that high-yield savings account rates will continue to decline. LendingTree analysts state that “the returns on high-interest savings accounts and Certificates of Deposit (CDs) will only continue to decrease, it’s time to take action and lock in the higher rates currently available.”
Despite this, top-tier online savings account rates and one-year term deposit rates are still holding above 4%, higher than the inflation rate, providing savers with a limited time window to ensure substantial returns.
(This article referenced reports from the Associated Press)