On July 31, the Federal Reserve of the United States concluded its Federal Open Market Committee (FOMC) meeting for July. Federal Reserve Chairman Powell confirmed after the FOMC meeting that a rate cut would be initiated as long as inflation continues to slow down. The market believes that the most likely time for the rate cut to happen is in September.
For the past year, the Federal Reserve’s benchmark interest rate has remained at its highest level in 23 years, and the market expects the central bank to continue cutting rates over the next two years. This implies that mortgage and credit loan rates will decrease.
A rate cut means a decrease in borrowing costs, which is good news for those in need of loans. However, the actual amount of money that individuals can save when the Federal Reserve cuts interest rates depends on the speed and magnitude of the cut, and the short-term savings may not be as significant.
According to a report by CNN, Greg McBride, the chief financial analyst at the financial services company Bankrate, stated that the rate cut will not happen too quickly, and initially, interest income for depositors will not be greatly affected.
Mortgages represent the largest debt for most individuals, and due to the substantial loan amounts involved, even a small rate cut could have a significant impact on the repayment amounts.
With expectations of a rate cut, mortgage rates in the United States have already declined. Freddie Mac, a U.S. mortgage institution, announced on August 1 that as of the week ending August 1, the average rate for a 30-year fixed-rate mortgage in the mainstream U.S. mortgage market had dropped to 6.73%, hitting a new low since early February of this year and lower than the 6.9% rate from the same period last year.
Since 1971, in each rate-cutting cycle, mortgage rates have decreased by at least 1.25 percentage points and often by 2 to 3 percentage points. For individuals looking to buy a home, they may consider refinancing to alter repayment terms and loan conditions to secure a lower rate and ease repayment pressure.
Another type of perpetually high-cost borrowing is credit card loans. A rate cut is unlikely to have a significant impact on the current average record-high interest rate of 20.7%. Even if the average rate decreases to the level of early 2022, at 16.3%, the interest would still be considerable.
If you carry credit card debt and are eligible, it is recommended to apply for a zero-rate balance transfer card, which offers a interest-free period of at least 12 to 18 months, allowing you to comfortably pay off the principal.
If you are considering financing the purchase of a new car, the impact of a rate cut may not be substantial. McBride pointed out that for a $35,000 car, a decrease of 1 point in the rate would lead to a $4 reduction in monthly payments. Therefore, a 1% rate cut would only result in saving around $16 per month or less than $200 annually.
According to Bankrate’s data, the yields on many savings accounts currently range from 4.5% to 5.2%. It is advisable to secure high-interest rates now; the rates on certificates of deposit (CDs) with terms ranging from two to five years are currently between 4.85% and 5%.
Some CDs offer higher rates but may have callable options where the issuing bank could redeem them early. For those looking to hold a CD long-term and receive expected interest income, it is recommended to choose non-callable CDs.
If you reside in a high-tax region, U.S. Treasury bonds may also be an option, as some bonds are exempt from state and local taxes.
(This article references a report by CNN)