- The Fed's interest rate reduction trickles down to family budgets in a variety of ways
- The cut does impact mortgage rates, but not in the way most people think.
- While lending costs may go down, interest earnings are also likely to decline.
For the first time this year, the U.S. Federal Reserve made an adjustment to its benchmark interest rate, assessing a .25% cut in a move driven by a weakening U.S. labor market.
The quarter point cut announced Wednesday, which puts the monetary body’s target rate in the 4.0% to 4.25% range, is the first since last December when the Fed’s rate-setting Federal Open Market Committee made the last of three straight interest rate reductions to end the year, shaving 100 basis points off its intra-bank overnight lending rate.
Wednesday’s rate change reflects the central bank’s decision to prioritize the labor side of its dual congressional mandate to enact policy that maintains price stability while maximizing employment. The Fed is currently facing the two-part dilemma of rising inflation alongside a declining U.S. employment market.
So, what does the rate change mean for me?
Where the Federal Reserve sets its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution’s total deposits — trickles down to consumers in numerous ways. Here are a few financial areas to keep an eye on in the changing economic landscape:
Mortgages
Mortgage rates don’t necessarily move in tandem with the Fed’s rate changes. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasury bonds.
Zions Bank mortgage manager Jeremy Holmgren told the Deseret News that rates aren’t going to move much following Wednesday’s Fed cut.
“The reason is simple: the market already anticipated this cut, and lenders priced it into mortgage rates over the past couple of weeks. That’s why we saw improvements before today, not after,” Holmgren told Deseret News reporter Lisa Riley-Roche.
But that doesn’t mean mortgage rates couldn’t go lower.
“If the Fed follows through with two more rate cuts this year, there’s room for mortgage rates to improve further — though, again, the biggest moves may happen before each announcement as markets build in expectations,” Holmgren said.
At a Wednesday press conference, Fed chairman Jerome Powell said rate cuts will help raise demand and reduce borrowing costs for builders but “most analysts think there would have to be pretty big changes in rates to matter a lot to the housing sector.”
Credit cards
Credit card rates are set by issuing institutions based on a number of factors, including the applicant’s personal credit history, but base rates are computed in part using the prime lending rate which is tied to the Fed’s benchmark rates. According to the Consumer Financial Protection Bureau, over the last 10 years, average (annual percentage rates) on credit cards assessed interest have almost doubled from 12.9% in late 2013 to 22.8% in 2023 — the highest level recorded since the Federal Reserve began collecting that data in 1994.
LendingTree reports that average credit card rates have not fallen since March of this year, but that could change following the Fed’s interest rate reduction.
Matt Schulz, LendingTree’s chief consumer finance analyst, said consumers can expect their credit cards’ interest rates to fall by an amount matching the Fed cut within the next few months.
Big-ticket spending
Lower interest rates can also make accessing credit, like qualifying for a home mortgage or new car loan, a bit easier as banks tend to loosen lending policy to reflect economic conditions.
While those looking to finance a big purchase are likely to see the Fed cut reflected in slightly lower borrowing rates, those changes are, like credit card rate adjustments, several months away.
Inflation
The Fed’s congressional mandate directs the monetary body to focus on two policy objectives: maximum employment and price stability. The Fed’s latest rate cut was primarily driven by a weakening jobs sector. Generally speaking, rate reductions help spur economic activity by reducing the cost of debt which can promote business activities like investment and hiring. Rate hikes, which increase the cost of consumer and commercial debt, quell spending and, theoretically, help slow down inflationary price increases.
At the press conference Powell noted that the decision to cut rates, while aimed at boosting job growth, could have other potential impacts including driving further price increases in U.S. goods and services.
“There are no risk free paths now,” Powell said. “We have to keep our eye on inflation and at the same time we cannot ignore and must keep our eye on maximum unemployment.”
Interest earnings
Mirroring changes in loan rates, the interest banks offer on savings accounts, certificates of deposit, money market accounts and a variety of other financial products are also likely to decline following the Fed’s rate reduction.
According to a report from Bankrate, last year’s interest rate cuts by the Fed led to lower annual percentage yields on customer accounts. The steepest declines were among the nation’s nontraditional online banks, according to the report. At their peak, the top high-yield savings account was paying a 5.55 percent APY. As of Thursday, the best offer is 4.35%.