The Fed is expected to cut interest rates another quarter of a point at the end of its two-day meeting on Dec. 18. This is the third consecutive rate cut, totaling a 10 percentage point reduction in the federal funds rate. September.
So far, central banks have moved slowly to readjust policy after quickly raising interest rates when inflation hit a 40-year high.
“This could be the last rate cut for a while,” said Jacob Channell, senior economic analyst at LendingTree.
He said the Fed may choose to take a “wait-and-see approach” due to uncertainty over President-elect Donald Trump’s fiscal policy as he begins his second term.
Meanwhile, high interest rates are impacting the cost of all types of consumer borrowing, from auto loans to credit cards.
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The federal funds rate, set by the U.S. central bank, is the interest rate at which banks lend and borrow from each other overnight. Although this is not the interest rate consumers pay, the Fed’s actions still affect the borrowing and savings rates that consumers see every day.
The December rate cut will lower the Fed’s overnight borrowing rate by 4.5 percentage points (25 basis points) from its current level of 4.50-4.75% to a range of 4.25-4.50%. There is a possibility that it will happen.
Brett House, an economics professor at Columbia Business School, said this would “relieve some financial pressure,” but not entirely.
“Some of the most important interest rates that people are facing are not benchmarked to the Fed rate,” he said.
From credit cards to car loans to home loans, we’ll explain how they work.
credit card
Most credit cards have variable interest rates, so they are directly tied to the Fed’s benchmark. In response to the rate hike cycle, the average interest rate on credit cards has increased from 16.34% in March 2022 to 20.25% now, near an all-time high, according to Bankrate.
Average credit card interest rates have remained largely unchanged, even though the central bank began cutting interest rates in September. Greg McBride, chief financial analyst at Bankrate, said card issuers are often slow to respond to the Fed’s cuts.
“Interest rates will be cut by one notch, but there will be a delay of up to three months,” Mr McBride said.
A better bet for people with credit card debt is to switch to a credit card with a 0% balance transfer rate and aggressively pay off the balance, he explained.
“Interest rates will not fall quickly enough to do the heavy lifting for indebted consumers,” he said.
mortgage interest rate
15- and 30-year mortgage rates are fixed and tied primarily to Treasury yields and the economy, so they don’t fall in step with Fed policy. And since most people have a fixed-rate mortgage, their interest rate won’t change unless you refinance or sell your current home and buy another property.
As of the week ending Dec. 6, the average interest rate on a 30-year fixed-rate mortgage was 6.67%, according to the Mortgage Bankers Association.
These rates are slightly lower than last month, but still well above the 2024 low of 6.08% in late September.
“Mortgage rates are likely to continue to fluctuate from week to week, and it is impossible to say with certainty where they will ultimately settle,” Channel said.
car loan
Car loans are fixed. However, as car prices have soared, payments have become higher and monthly payments have become lower.
The average interest rate on a five-year new car loan is currently around 7.59%, according to Bankrate.
Bankrate’s McBride said people planning to finance a new car could benefit from future interest rate cuts, but the Fed’s next actions won’t have a material impact on how much money they get. He said no. “The sticker price is high and the loan amount from the borrower is very high,” he said, averaging about $40,000.
“Even at very low rates, it’s a monthly payment that drains your budget.”
student loan
Federal student loan interest rates are also fixed, so most borrowers won’t be immediately affected by rate cuts. However, if you have a private loan, the loan may have a fixed interest rate or a variable rate linked to Treasury Bills or other interest rates. In other words, when the Fed lowers interest rates, interest rates on private student loans will also fall.
Eventually, borrowers with existing variable-rate private student loans may also be able to refinance into cheaper fixed-rate loans, according to higher education expert Mark Kantrowitz. He says there is no.
But refinancing federal loans into private student loans means losing the safety net that comes with federal loans, “such as deferment, forbearance, income-based repayment, and loan forgiveness and forgiveness options,” he said.
Plus, if you extend the term of your loan, you’ll end up paying more interest on your balance.
savings rate
Central banks do not directly influence deposit rates, but yields tend to correlate with changes in the target federal funds rate.
Bankrate’s McBride said that as a result of the Fed’s series of rate increases in recent years, the highest-yielding online savings accounts have delivered the best returns in decades, and still pay close to 5%. It is said that there is
“It’s still a good time to save and a good time to get some cash,” he said. “The most competitive offers are still well ahead of inflation, and that is likely to continue.”
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