The Federal Reserve is widely expected to bring about a long-awaited interest rate cut during its next meeting. But just how big will that potential rate cut be?
The central bank held interest rates steady in July — a move that was expected and kept rates at the 5.25% to 5.5% range. But Fed Chair Jerome Powell said at the time that the first rate cut since the early days of the COVID-19 pandemic could be coming as soon as the next Federal Open Market Committee (FOMC) meeting Sept. 17-18.
It could be too little, too late, according to some experts. After a disappointing July jobs report, some economists expressed doubts that the U.S. could avoid a recession at this point, and the market sell-off last week showed investors are worried about a slowing economy as well.
When the Fed does move rates, they usually choose to do so in 25 basis-point increments. But it has been known to make larger decreases, like when it cut rates by half a percentage point and then a full percentage point in March 2020, and recent events have spurred many onlookers to consider the possibility of a more dramatic cut again in coming months.
What will the Fed do about interest rates in September?
While the market has already bounced back, the tumble last week sparked speculation that the Fed could implement an emergency interest rate cut. Jeremey Siegel, professor emeritus of finance at University of Pennsylvania’s Wharton School, even told CNBC that the central bank should make an emergency 75 basis-point cut and “another 75 basis-point cut indicated for next month at the September meeting — and that’s minimum.”
Making a rate cut between FOMC meetings would be highly unusual for the Fed.
“They have a really high bar for that,” Steven Blitz, chief U.S. economist at GlobalData TS Lombard told The Wall Street Journal. “I think what they would rather do is go out and say, ‘If things continue the way they are, 50 basis points in September is on the table.’”
But some experts have doubts that we’ll even see a 50-basis point cut next month. Nearly 80% of economists surveyed by Bloomerg recently predict the Fed will make a quarter-point decrease to a range of 5% to 5.25% in September. Meanwhile, CME Group’s FedWatch Tool, shows a pretty even split between the possibility of a 50-basis-point cut and a 25-basis-point one, with the probability of the larger cut slightly higher.
What will happen to rates after September?
The FOMC will meet two more times after September — in November and December — and next month’s likely rate cuts are expected to be the first of several.
After July’s weak jobs numbers, the chief investment office at UBS Wealth Management said in a report that it now expects the Fed to cut rates by 100 basis points this year, which is up from its prior forecast of 50 basis points.
Meanwhile, interest rate futures signal a 52% chance that the Fed will cut interest rates to the 4.5% to 4.75% range in November, and a 45% chance that rates will come down to the 4.25% to 4.5% at the December meeting, according to CME Group’s tool.
What interest rate cuts mean for consumers
The federal funds rate — which is the benchmark interest rate figure that the Fed makes decisions about at its FOMC meeting — determines the rate at which banks lend money to one another overnight. A trickle-down effect means that changes to the federal funds rate can influence how expensive it is to borrow money for consumers, and how much interest you can earn in savings accounts.
Generally, when interest rates get cut, mortgage rates come down as well. Rates could also drop for auto loans, personal loans and student loans, depending on the type of loan. And of course, when rates fall, you may have the chance to lower your monthly payments by refinancing mortgages and other loans.
The cost of borrowing money via a credit card could also decrease, but these annual percentage rates (APRs) are always high, and financial advisors tend to recommend prioritizing paying off credit card balances regardless of the broader rate environment.
But rate cuts also mean lower savings rates. In recent years, consumers have gotten used to annual percentage yields (APYs) of around 5% on high-yield savings accounts. Banks tend to follow in the path of the Fed, which means that those rates will likely come down as the federal funds rate does. (However, with the Fed only expected to cut rates by 25 to 50 basis points in September, there’s still time to take advantage of the high yields).
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