The US Federal Reserve is expected to lower borrowing costs again on Wednesday.
If September’s rate cut is followed by another quarter-point rate cut, the federal funds rate would range from 3.75% to 4.00%.
The federal funds rate, set by the Federal Open Market Committee, is the interest rate that banks lend and borrow from each other overnight. Although this is not the interest rate consumers pay, the Fed’s moves have a trickle-down effect on many types of consumer loans.
The FOMC has indicated the prospect of further interest rate cuts in December, but the path forward thereafter is unclear. President Donald Trump has said that a successor to current Federal Reserve Chairman Jerome Powell could be chosen by the end of the year, and has repeatedly referred to the Fed’s policies, insisting that interest rates should be significantly lowered.
It is not a given that interest rates will continue to fall, and even if they do, not all consumer products will be affected in the same way.
“The Fed isn’t cutting rates everywhere.”
When the Fed raised rates in 2022 and 2023, interest rates on most consumer loans quickly followed suit. Even if this is the second consecutive rate cut, many consumer interest rates are likely to remain high for now.
“The Fed is not cutting every interest rate in the world,” said Mike Pugliese, senior economist at Wells Fargo Economics.
He said that depending on the term, some borrowing rates are more sensitive to Fed changes than others: “At one end of the spectrum you have shorter variable rates and at the other end you have 30-year fixed rate mortgages.”
These short-term interest rates are more closely tied to the prime rate, which is the rate banks offer to their most credit-worthy customers, and are typically 3 percentage points higher than the federal funds rate. Long-term interest rates are also affected by inflation and other economic factors.
Credit cards won’t go from terrible to great overnight.
Olga Lorenko | Moments | Getty Images
According to Bankrate, nearly half of American households have credit card debt and pay an average of more than 20% interest on their revolving balances, making credit cards one of the most expensive ways to borrow money.
Most credit cards have short-term variable interest rates, so they are directly tied to the Fed’s benchmark.
If the Fed lowers interest rates, the prime rate will also drop, and interest rates on credit card debt may adjust within a billing cycle or two. But even then, credit card annual interest rates will only ease from their extremely high levels. And card issuers have generally kept interest rates slightly higher to reduce exposure to riskier borrowers.
“Even if the Fed steps on the gas to cut rates in the coming months, credit card rates won’t go from terrible to amazing overnight,” said Matt Schultz, chief credit analyst at LendingTree.
For example, if you have $7,000 in debt on a credit card with an interest rate of 24.19% and are paying $250 each month on that balance, lowering your APR by a quarter could save you about $61 over the life of your loan, Schultz said.
Minor benefits for car and home buyers
Although auto loan interest rates are fixed for the life of the loan, potential car buyers could benefit from lower borrowing costs in the future, experts say.
Currently, the average interest rate for a five-year new car loan is about 7%. Jessica Caldwell, head of insights at Edmunds, previously told CNBC that “the Fed’s modest rate cuts won’t significantly reduce consumers’ monthly payments, but they will increase overall buyer sentiment.”
Like mortgages, long-term loans are less affected by the Fed. Both 15-year and 30-year mortgage rates are more closely tied to Treasury yields and the economy.
Still, experts say the prospect of further rate cuts in the future could put some downward pressure on mortgage rates, which “could cause more Americans to consider returning to the housing market after being on the sidelines for so long,” LendingTree’s Schulz said.
Other mortgages are more closely tied to Fed movements. Adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are fixed at the prime rate. Most ARMs adjust once a year, but HELOCs adjust quickly.
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