07/25/2024
***********GOOD READ - HOW INTEREST RATE CUTS WILL AFFECT YOU**********
What financial impacts can you expect when the Fed finally cuts rates?
Story by Becca Stanek, The Week US
• 7h • 3 min read
After years of rate hikes, followed by over a year of rates remaining at a 23-year high, the Federal Reserve is finally poised to slash its benchmark interest rate at some point in the coming months. It is not yet clear when exactly this rate cut will come, but Fed officials have predicted they will make at least one cut in 2024, followed by more the following year.
While a lower Fed rate may sound like an all-around good thing for consumers, it turns out that it is more of a mixed bag. "If the Fed does cut its federal funds rate, you could earn less on deposits, but pay less on loans," said CBS News.
Here is a closer look at how Fed rate cuts will impact your personal financial situation, as well as some money moves you might want to consider making ahead of the upcoming changes.
What effects could Fed rate cuts have for your finances?
A federal funds rate reduction "can have both positive and negative effects on your finances, though the actual impact will depend on your particular situation," said Experian. In general, here are some of the notable effects that a Fed rate cut can have:
You could save money on loans. "If you have a loan with a variable interest rate, such as a student loan or adjustable-rate mortgage loan, your interest rate changes regularly based on market conditions," which means that "you'll likely benefit from each rate reduction with a corresponding decrease in your loan's interest rate," said Experian. While you won't enjoy this benefit on fixed-rate loans you already have, "if you plan on taking out a personal loan, auto loan, student loan or home equity loan, waiting for Fed rate reductions could save you some money," as it may result in lower rates.
Your credit card interest rate might go down. Credit cards also fall under the category of variable-rate debt, which means that you could see a reduction in your credit card rate as well. In fact, said CNBC, "credit card holders could see a reduction in their annual percentage yield, or APR, within a billing cycle or two," though this shift will only apply to APRs that are within "extremely high levels."
You'll get a lower APY on your savings. The flipside of a Fed rate reduction is that "while borrowing will become less expensive, those lower interest rates will hurt savers," said CNBC. Although "the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate," said CNBC. In other words, as the Fed rate drops, so, too, do the rates you can secure on savings options like high-yield savings accounts and certificates of deposit (CDs).
What money moves should you make prior to rate cuts?
Although you cannot predict the Federal Reserve's next move, you can get out ahead financially by preparing for the rate cuts that are bound to come at some point in the near(ish) future. Ahead of rate cuts, consider:
Switching over to a high-yield savings account. Ahead of rate cuts, "take advantage of higher APYs while you can" by moving your savings to a high-yield savings account, said Experian.
Locking in current savings rates. Prior to rate cuts that will reduce savings rates, consider locking in current rates by opening a longer term CD or money market account.
Holding off on making large purchases. For purchases like a home or a car, you might be better off waiting until the Fed makes its move, "since lower interest rates could reduce the cost of financing down the road," said CNBC.
Going for a HELOC over a home equity loan. If you plan to tap your home's equity, consider getting a home equity line of credit (HELOC) rather than a home equity loan. Because "HELOCs typically come with variable rates while interest rates on home equity loans are usually fixed," said CBS News, "opting for a variable rate over a fixed rate could offer meaningful long-run savings."
