Lower yields on deposits but better terms on credit cards: Those are two ways consumers might feel some impact from the next Federal Reserve interest-rate cut, which is looking more likely amid recent signs of economic weakness.
However, the long-anticipated move might not do much good for your finances, unless it’s followed by a series of cuts and your financial situation enables you to take advantage of them.
“While any interest-rate reduction is positive, it’s important to note that the extent of these positive impacts can vary based on how quickly banks and financial institutions pass on the lower rates to consumers,” said Jim Triggs, president and CEO of Money Management International, a debt-counseling agency. Plus, people with poor credit scores might not be able to take advantage of the refinancing opportunities that lower rates can bring, he added.
The Fed hasn’t cut rates since March 2020, during the early days of the COVID-19 pandemic. Since then, the Central Bank has raised rates by a combined 5.25 percentage points. The emphasis has been on slowing the economy to keep inflation from getting out of hand. Economists are still debating whether all that has been enough, but the economy finally appears to be cooling, which makes one or two rate cuts probable.
Rate-tracker Bankrate recently showed how much certain rates have risen over the past three years. The company’s measure compared average rates from late July 2021 to late July 2024:
- On traditional 30-year fixed mortgages, average rates rose from around 3% to 6.9%.
- On $30,000 home-equity lines of credit, they more than doubled from 4.2% to 9.2%.
- Interest rates on home-equity loans jumped from 5.3% to 8.6%.
- Average credit-card rates increased from 16.2% to 20.7%.
- Rates on four-year used-car loans advanced from 4.8% to 8.5%.
- Those on five-year new-car loans increased from 4.2% to 7.9%.
Possible impact on mortgages, savings accounts
Fed actions focus on short-term interest rates and don’t directly affect long-term rates, such as those on 30-year fixed mortgages, which track 10-year Treasury notes. Mortgage rates also have been on the upswing in recent years amid concerns about rising inflation, though they have started to ease in recent weeks and will fall further if the economy slows.
“Sales of existing homes have dipped to their lowest level since 2010, as homeowners sitting on below-market-rate mortgages are staying put,” with sagging new-home sales and ample inventory of unsold dwellings, wrote Jack Ablin of Cresset Capital Management in a recent commentary. Lower interest rates on mortgages would give sellers a boost and make homeownership more affordable to potential buyers, he added.
If the Fed does embark on a series of rate cuts, it will present opportunities for people to refinance existing debts, but this trend will work against savers shopping for deposit accounts or stashing cash in money-market accounts.
That’s why Greg McBride, Bankrate’s chief financial analyst, suggests locking in yields now on certificates of deposit if you’re looking for one.
“There is no advantage to waiting, as yields will trend lower as we get closer to the first Fed rate cut and accelerate further the longer you wait,” he said in a recent commentary.
A move toward lower yields has already started. According to Bankrate, top-yielding CDs with five-year maturities now pay less than 4.5%, down from a peak of 4.85% last October. Yields on one-year CDs are now near or below 5%, down from 5.75% in December.
Rate cuts might not provide much relief
For consumers now struggling with high debts, Triggs noted that rate cuts alone might not be enough to reduce their monthly debt payments by much. “The principal amount owed can still be overwhelming, requiring more substantial financial intervention,” he wrote in an email to The Republic.
Plus, consumers with low credit scores might not be able to qualify for new loans or refinancing options. A Bankrate survey in March indicated that half of respondents had been denied a loan or financial product since the Fed began raising rates two years ago. That mainly applied to consumers with credit scores below 670 on the standard FICO scale of 300 to 850.
If lower rates come with a cooling economy, job prospects might dim. That hasn’t been the case yet, with unemployment still at a relatively low 4.3%, yet many consumers already are struggling. Money Management International saw a 52% jump in new credit-counseling clients in the first half of 2024 compared to the same period last year, with new clients carrying an average unsecured debt of $28,000.
For some people, Triggs recommends debt-management plans that incorporate budgeting, prioritized debt-payment strategies and professional financial guidance that might need to include negotiations with creditors.
“While interest-rate cuts can provide some relief,” he said, “a comprehensive approach that includes debt-management strategies and financial education is often needed” for consumers to achieve long-term success.
Reach the writer at russ.wiles@arizonarepublic.com.
