The Federal Reserve is finally lowering rates. Here’s what consumers should know

NEW YORK — The Federal Reserve has cut its key interest rate from a 23-year high, affecting debt, savings, auto loans, mortgages and other forms of borrowing by consumers and businesses.

On Wednesday, the Fed announced it had cut its key interest rate by an unusually large half-percentage point, to a range of 4.75 percent to 5 percent, the first rate cut in more than four years.

The central bank is acting because, after 11 rate hikes since March 2022, it is confident that inflation is finally mild enough to lower borrowing costs. At the same time, the Fed has become more concerned about the health of the labor market. Lower interest rates would help support the pace of hiring and keep unemployment low.

“Recent indicators suggest that economic activity continues to expand at a robust pace,” the Fed said in a statement. “Job growth has slowed and the unemployment rate has increased, but remains low. Inflation has increased further.”

More Fed rate cuts are expected in the coming months. The extent of the cuts will depend on the direction of inflation and employment growth.

“We know it’s time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation,” Fed Chairman Jerome Powell said at a news conference. “The labor market is actually in solid shape and our intention with our policy change today is to keep it there.”

“We don’t think we’re behind — we think this is timely,” he added. “But I think you can see this as a sign of our commitment not to be behind.”

While some may feel justified in taking action now to take advantage of lower interest rates, such as moving money out of a deposit or refinancing a mortgage, you shouldn’t feel obligated to completely change your financial strategy just because interest rates are falling,” said Jacob Channel, senior economist at LendingTree.

“Act prudently and responsibly,” Channel said, “and don’t make hasty decisions based on a single Fed meeting or economic report.”

Ultimately, interest rates for savers will fall as the Fed lowers its base rate.

“As attractive as the returns on savings instruments have been lately, it’s wise not to hold too much in cash because these are short-term instruments and their returns are volatile,” said Christine Benz, director of personal finance at Morningstar. “The really great returns we’ve had lately could fall even further.”

If you don’t have an immediate need for cash, you can continue to lock in what are “still decent yields that are being offered,” she said. In that case, “longer-term deposits might make sense.”

“Lower interest rates make it harder to maximize savings and preserve capital while interest rates have been higher,” said Matt Brannon, a personal finance expert at MarketWatch Guides. “One easy short-term measure to protect your savings is to move your money into a high-yield savings account, which offers higher interest rates than traditional savings accounts… These types of savings accounts still help you preserve capital because of their relatively higher interest rates.”

“While lower interest rates are certainly a good thing for people struggling with debt, the truth is that this one rate cut isn’t going to make much of a difference for most people,” said Matt Schulz, a credit analyst at LendingTree.

That said, the Fed’s falling benchmark rate will ultimately lead to better rates for borrowers, many of whom face some of the highest credit card interest rates in decades. The average interest rate is 23.18% for new listings and 21.51% for existing accounts, according to WalletHub’s August Credit Card Landscape Report.

Still, “the best thing people can do to lower interest rates is take matters into their own hands,” Schulz said. “Consolidating your debt with a 0% balance transfer credit card or a low-interest personal loan can have a much bigger impact on your debt burden than most things the Fed will do.”

The Fed’s benchmark rate doesn’t directly determine or correspond to mortgage rates. But it does have a large indirect influence, and the two “generally move in the same direction,” according to LendingTree’s Channel.

Namely, mortgage interest rates have already fallen before the Fed’s predicted rate cut.

“It shows that even if the Fed does nothing and rates stay the same, mortgage rates can still move,” he said.

Channel said the majority of Americans have mortgages with interest rates of 5%, so interest rates may have to fall even further than expected. current average of 6.46% before many people consider refinancing.

“With auto loans, it’s good news that interest rates are going to come down, but it doesn’t change the fundamentals of blocking and dealing, which is that it’s still very important to shop around and not just accept whatever interest rate a car dealership would offer you at the dealership,” said Greg McBride, an analyst at Bankrate. “It’s also very important to save what you can and try to put as much money down on that vehicle as you can.”

McBride predicts that the rate cuts and the avoiding a recession will lead to lower auto loan rates, at least for borrowers with strong credit profiles. For those with poorer credit profiles, double-digit rates are likely to persist for the rest of the year.

Robert Frick, a business economist at Navy Federal Credit Union, thinks the rate cut will also apply to auto loans, but that it probably won’t happen immediately and that people with higher credit scores will benefit first.

According to Edmunds.com, new vehicle loans currently average 7.1%, while used vehicle loans are much higher at 11.3%.

Those tariffs, combined with still-high prices, have many potential buyers sitting on the sidelines waiting for tariffs to ease. Partly as a result, U.S. new-vehicle sales rose just a sluggish 2.4% through June.

High prices and rates have also led to more delinquencies and defaults on auto loans, especially among people with lower credit scores. As a result, Frick said, many lenders will likely try to keep rates high to cover potential losses.

“Rates will come down, but we shouldn’t expect them to come down quickly overall,” he said.

Frick advises waiting for the Fed to cut rates further if possible, especially if you’re buying a used car.

Jeff Schuster, vice president of auto research at Global Data, doubts the Fed’s modest rate cuts will be enough to entice many buyers unless automakers offer their own low-interest loans and other discounts.

“I think we need to make a few more cuts before we actually get substantial relief for those consumers,” he said.

Consumer prices rose 2.5% in August year-on-year, down from 2.9% in July — the fifth consecutive annual decline and the smallest since February 2021.

To hire in august unemployment rose slightly and fell for the first time since March. Employers added 142,000 jobs, up from 89,000 in July. The unemployment rate fell to 4.2% from 4.3%, the highest level in nearly three years.

These signals indicate that the labor market is cooling, but still stable.

The pace at which the Fed continues to cut rates after September will depend in part on what happens to inflation and the labor market in the coming weeks and months.

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