Impact of Fed interest rate cuts on your household finances

The US Federal Reserve (Fed) lowered borrowing costs for the second time in a row on Wednesday.

Cutting the federal funds rate by a quarter of a percentage point would put the benchmark in the 3.75%-4.00% range. The decision came amid intense pressure from President Donald Trump, who has repeatedly called on Federal Reserve Chairman Jerome Powell to significantly cut interest rates, arguing that it would make it easier for businesses and consumers to borrow and revitalize the economy.

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 a fee that consumers pay, the Fed’s move has ripple effects across many types of consumer products.

For frail Americans, the move could provide some relief from high borrowing costs, said Mark Zandi, Moody’s chief economist. “Their standard of living has leveled off, and many are uncomfortable with this,” Zandi said. “Many people have borrowed money to supplement their income and are now paying interest on that debt.”

Many short-term consumer interest rates are pegged strictly to the prime rate, which is the rate set by banks and applied to their most credit-worthy customers, and is typically 3 points higher than the federal funds rate. Long-term interest rates are also affected by inflation and other economic factors.

See how central bank policy can affect interest rates, from credit cards and car loans to mortgage rates, student loans and savings accounts.

Credit cards are one of the main sources of unsecured borrowing, with 60% of credit card users carrying debt each month, according to a March report from the New York Fed.

But credit card interest rates are currently near all-time highs, averaging over 20%, according to Bankrate.

Most credit cards have 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. However, credit card annual interest rates will still remain very high.

When the Fed cut interest rates in the second half of 2024, lowering the threshold by 1 percentage point through December, average credit card interest rates fell by just 0.23 percentage points over the same period, according to CardRatings analysis.

“A quarter-point rate cut is good, but it doesn’t make much of a difference for people with balances on their credit cards,” said Stephen Kates, a financial analyst at Bankrate.

When it comes to interest savings, “it comes down to dollars per month,” Cates says. “It’s not nothing, but it’s not a lot either.”

For example, if you have $7,000 in credit card debt on a card with a 24.19% interest rate and pay $250 a month on that balance, lowering your APR by a quarter could save you about $61 over the life of your loan, according to calculations by Matt Schultz, chief credit analyst at LendingTree.

Although mortgages make up the bulk of consumer debt, these long-term loans are less susceptible to the Fed. 15-year and 30-year mortgage rates are fixed for the life of the loan, so most homeowners won’t be immediately affected by the rate reduction.

Mortgages are also more closely tied to Treasury yields and the economy. Still, homebuyers could benefit if expectations for future rate cuts put downward pressure on mortgage rates.

“This is a tangible opportunity for consumers,” said Michele Ranelli, vice president and head of U.S. research and consulting at TransUnion.

For example, with an additional 25 basis points reduction, a new homebuyer who secures a $350,000 mortgage at a 6.75% interest rate could see their monthly payment drop by nearly $150, Ranelli said. “Over time, these savings can significantly reduce household budget pressure,” she 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.

In addition to mortgages and credit card debt, car loans also account for a large portion of household expenses. But interest rates are just one factor. High prices and President Trump’s tariffs are worsening the affordability equation for car buyers.

Interest rates on auto loans, like most mortgages, are fixed for the term of the loan, so potential car buyers could primarily benefit from lower borrowing costs in the future, experts say.

“In today’s high interest rate, high price environment, another 25 basis point rate cut may not significantly reduce monthly payments, but it could lead to an increase in consumer confidence,” said Joseph Yun, consumer insights analyst at Edmunds.

“More importantly, it may signal that financial institutions and automakers are preparing to introduce additional lending incentives ahead of the holiday season,” he said. “For many shoppers who have been waiting for the right deal, now may be the moment when more attractive offers finally start to emerge.”

Federal student loan interest rates are also fixed. Interest rates on new loans only reset once a year, on July 1st, so most borrowers won’t be immediately affected by the rate reduction.

Higher education expert Mark Kantrowitz said that when interest rates eventually fall, borrowers with fixed-rate private student loans may be able to refinance into cheaper loans.

However, refinancing federal loans to private student loans would mean losing some of the “great benefits” of federal student loans, such as income-driven repayment plans, loan forgiveness, and forbearance options that currently exist, as well as deferment and forbearance improvements, he said. President Trump’s “Big and Beautiful Bill” would phase out some of these repayment plans in 2028.

Additionally, some private loans have variable interest rates tied to Treasury bills or other benchmarks, and borrowers with variable-rate private student loans could automatically get lower interest rates in line with the Fed’s moves, Kantrowitz said.

For savers, it’s even more important to take matters into their own hands now that the Fed is on the path to lower interest rates. Central banks do not directly influence deposit rates, but yields tend to correlate with changes in the target federal funds rate.

“Yields on high-interest savings accounts and CDs will continue to decline,” LendingTree’s Schultz said. “The time is likely now to act to lock in today’s high interest rates.”

According to Bankrate, the highest-yielding online savings account and one-year certificate of deposit interest rates are currently above 4%, which is still above the rate of inflation.

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