Introduction to Interest Rate Cuts
The chairman of the Federal Reserve, Jerome Powell, recently gave a speech that could impact everything from global markets to individual Americans. Powell emphasized that the upcoming interest rate decision depends on economic data. However, based on his comments, Fed watchers are predicting a rate cut at the Central Bank’s next meeting in mid-September.
Impact on Bank Savings and CDs
When the Fed lowers its key overnight loan rate, lower interest rates for bank savings and loans usually follow. However, savings rates and CD yields may start to slip even before a decision is made. "The savings rates and the CD yields begin to slide, and this will pick up speed if we approach the actual resumption of rate cuts," said Greg McBride, Chief Financial Analyst at Bankrate.
Existing Loans and Credit Cards
Every loan that has already been locked in with a fixed interest rate will not change. Every new loan being sought will likely have a lower interest rate than would have been seen if the Fed had not cut rates. In contrast to the forward-looking interest returns of the interest that a bank has to pay you in savings, banks will likely not drop the interest rates they charge you as quickly.
Credit Card Interest Rates
Your credit card issuer may lower your variable rate and pass on the Fed’s rate cut, but there could be up to a three-month delay, said McBride. However, do not expect to save a lot of money if and when it happens. Why? Credit card rates are already very high – the average is still 20.13% according to Bankrate. A quarter or up to half a percentage point reduction does not do much for you if you carry a balance from month to month.
Mortgage Interest Rates
If you want to buy a house or refinance your mortgage, it is not clear how influential a Fed rate reduction will be. Mortgage rates are not directly tied to Fed moves but rather to moves in the yield of the 10-year US Treasury. And that yield is influenced by a variety of economic expectations. "Inflation, debt, and deficits have driven mortgage rates higher and will likely limit the extent to which mortgage rates drop," said McBride. "If the economy doesn’t start to slow, we’re probably not going to see mortgage rates below 6%. Not for a while."
