After sharply raising rates to fight inflation, the Federal Reserve is signaling it will cut rates at a more measured pace. After a larger-than-usual 0.5 percentage point cut in September, the central bank’s rate-setting committee last week cut the benchmark rate by a further 0.25 percentage point.
The Federal Reserve’s benchmark federal funds rate affects borrowing costs for individuals and businesses. In theory, with two cuts already in effect and Wall Street putting a 65% chance of another 0.25 percentage point cut in December, it should become cheaper for individuals and businesses to borrow money. On the other hand, banks will be less willing to pay generous interest rates on your deposits because the federal funds rate will drop.
But in most cases, this is not a direct transition, and it may be some time before consumers actually feel the effect of the Fed’s rate adjustments. To filter by credit cards, savings accounts, mortgages and other products.
Here’s what borrowers and savers can expect with rates in the coming months—and why it’s not always easy to see the impact of the Fed’s actions on interest rates on everyday financial products.
Savings accounts and certificates of deposit
People who have locked in an interest rate above 6% can pat themselves on the back because the days of such returns are a thing of the past. But the good news is that you can still find banks and credit unions offering yields of around 5% on CDs and rates of 4% or higher on savings accounts, even though the average savings account rate is an unimpressive 0 .45%, according to the FDIC.
Still, “most of them are going to continue to cut rates a little more if they haven’t already,” says Brian Johnson, chief financial officer of CD Valet, an online marketplace for CD accounts.
While the interest rates that banks and credit unions offer on products such as savings accounts and certificates of deposit depend on the federal funds rate, the funding needs of these banks also factor into the equation, says David Goeden, head of retail and online banking. at LendingClub. The degree of competition for your money also plays a role, as banks are more likely to relax their terms if they are concerned about attracting new customers and keeping existing ones from getting their dollars out the door.
Financial experts say you can still find places where you can get a good return on your money – if you’re willing to do the grunt work of comparison shopping.
“Customers need to shop around,” says Goeden. “Look at companies that consistently have higher rates,” he advises. Putting your money into a bank or credit union that consistently offers decent rates may be smarter than constantly moving your money around in pursuit of the highest yield, since the highest rates usually come with strings attached, such as high minimum balances or, in the case of CDs, strange conditions that can be difficult to track.
Credit cards
Almost all credit cards today have variable interest rates, usually tied to the prime rate. (Typically, the prime rate is calculated by adding three percentage points to the federal funds rate.) So when the Fed changes rates, the change is usually reflected in your credit card rates within one or two reporting cycles.
The Fed’s recent rate hike cycle has sent credit card annual percentage rates (APRs) to record highs. Fed data shows the average annual interest rate was 21.8% at the end of August, when the effective federal funds rate was 5.3%. By comparison, in February 2022, when the effective federal funds rate was below 0.1%, the average credit card APR was 14.6%.
“Anything that is a variable rate product and is tied to a prime is going to go down first,” says Michele Raneri, vice president and head of U.S. research and consulting at credit bureau TransUnion. “Fixed-rate loans and other products could be next,” Raneri says, but adds that other factors besides the federal funds rate influence what lenders charge, with borrowers’ credit history being a key variable. Although the annual percentage rate on credit cards is usually equal to the prime rate plus a specified margin, which reached a record high of just over 14% last year, issuers charge higher interest rates to customers with fair or poor credit who they deem to be subject to greater risk. about delays in payments. Credit card delinquency rates are rising, albeit from low levels.
“At the intersection of rates and credit, what matters is the quality of credit for individuals,” Raneri says. In other words, if you’re hoping to get a higher interest rate on your next credit card, make sure your credit score is as high as you can get it.
Car loans
Rates on auto loans, like other types of fixed-rate installment loans, remain somewhat stagnant, Raneri said. “We’re seeing a lot of interest rates remain unchanged,” she says. “I’m not sure we’re seeing much change (because) it’s not just the Fed rate, it’s also the base rate and Treasury bills,” she says.
As rates remain stable, lenders today want to see top-tier credit scores. “We’ve seen lenders expect better credit quality” when issuing auto loans, Raneri says. “Superprime originations grew by double digits year-on-year,” while originations at other credit tiers remained flat or declined.
If you’re waiting for your car loan to go down before you buy a car, this waiting period could be a good opportunity to boost your credit score so you can get the best deal when rates start to drop. , says Raneri.
“You will only get a higher interest rate if you have a good credit rating. Having a little more time for this can be a good thing.”
Mortgage
The long-term nature of mortgages makes them less susceptible to the direct impact of Fed policy actions, and these dynamics can lead to sometimes confusing market signals. For a 30-year mortgage, the average fixed rate peaked at 7.78% last November, according to Fannie Mae. It’s eased slightly since then, falling to just over 6% back in September, a week after the Fed cut rates for the first time since 2020.
You’d be in good company if you assumed that rates would fall even further when the Fed cut interest rates again. Instead, rates rose to 6.79% from their September low. Unfortunately for disappointed buyers, investors had already priced in a 0.5 percentage point move from the Fed in September. When subsequent data showed the economy was healthier than expected, investors tempered their expectations for further cuts, causing mortgage rates to rise.
The long terms of most mortgages mean that changes in mortgage rates are closely correlated with movements in the 10-year Treasury bill rather than the federal funds rate. David Berson, chief US economist at investment firm Cumberland Advisors, explained to Money that investors place more weight on expectations for future inflation and economic activity than on the Fed’s performance. These assumptions support high mortgage rates.
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