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of Federal Reserve The Fed is widely expected to lay the groundwork for a September rate cut at the end of its meeting on Wednesday, providing some relief to Americans who have been struggling with soaring borrowing costs.
While lower interest rates may be a blow to savers, borrowers are likely to see lower payments on everything from credit cards to mortgages to student loans.
The federal funds rate is not paid directly by consumers, but it affects the costs of borrowing money, including mortgages and auto loans. credit cardRising interest rates have pushed the average rate on a 30-year mortgage above 7% for the first time in years, and the costs of all kinds of borrowing, including home equity loans, auto loans and credit cards, have also soared.
in fact, Ease of buying a home Astronomical increases in mortgage interest rates have made the current housing market as bad as it was at the peak of the 2008 housing bubble.
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But mortgage rates could fall if the Fed cuts interest rates in September, according to Jacob Channell, senior economist at LendingTree.
Pedestrians pass by the Marriner S. Eccles Federal Reserve Bank Building in Washington, DC on June 3, 2023. (Photographer: Nathan Howard/Bloomberg/Getty Images)
of Atlanta Fed Home Affordability MonitorThe index, which compares median home prices and other housing costs to median household income, shows that the median U.S. household would need to spend about 39.8% of their income to buy a median-priced home as of February, an improvement from the end of 2023 but still far below typical pre-pandemic levels.
“A cut in the Fed’s target rate would likely mean lower mortgage rates,” Channell said, “but many other factors also affect mortgage rates, including bond market trends and the state of inflation. This means that mortgage rates could change significantly while the Fed keeps its target rate steady.”
Americans with credit card debt are also feeling the hit of rising interest rates.
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The average interest rate on a credit card has already skyrocketed to 20.71% as of last Wednesday, from 16% in February 2022, before the Fed began raising rates, according to Bankrate’s database.
Even small changes in credit card interest rates can affect how much debt Americans owe.
For example, if the average American owes $5,000, at current APR levels it would take about 277 months and $7,723 in interest to pay off the debt with minimum payments. By comparison, if interest rates were lower, it would take 269 months and $6,126 to pay off the same amount of debt.
Even if the Fed delivers a 25 basis point rate cut in September, these rates are unlikely to fall significantly anytime soon.
“Unless the economy turns around completely, interest rates are unlikely to fall quickly or rapidly enough to provide substantial relief to borrowers,” said Greg McBride, chief financial analyst at Bankrate.
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For many consumers, rising interest rates came with a silver lining.
largely Banks and Credit Unions A period of rising interest rates can provide a good opportunity for some Americans, especially retirees who are living off their savings, to boost their savings rate and increase their income.
Federal Reserve Chairman Jerome Powell announced the decision to keep interest rates steady during a press conference in Washington, DC on June 12, 2024. (Photo: Kevin Dietsch/Getty Images/Getty Images)
According to Bankrate, the national average bank savings rate hit 0.45% as of July 22, but was only 0.01% at some of the largest U.S. banks, a notable drop from the 0.58% savings rate at the start of May.
There’s another, much more lucrative option: high-yield savings accounts. Many currently offer yields between 4.2% and 5.27%, making them an option for consumers looking for a low-risk return. Savers can open a high-yield savings account online, but they should make sure the bank is insured by the Federal Deposit Insurance Corporation (FDIC).
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According to Bankrate, there are currently more than 20 savings and money market savings accounts offered by FDIC-insured banks nationwide that offer interest rates of 3.75% or higher.
If the Federal Reserve cuts its benchmark interest rate, those more favorable rates could start to disappear.
“As we approach the Fed’s first rate cut, interest rates on certificates of deposit and savings accounts will fall,” McBride said. “Now is a great time to lock in the most competitive certificate of deposit yields well above the targeted inflation rate. There’s no point waiting in hopes of better yields later.”
