The Federal Reserve is gearing up to potentially cut interest rates in September, a move that could bring much-needed relief to Americans feeling the squeeze from high borrowing costs.
With the conclusion of its latest meeting on Wednesday, the Fed is widely expected to set the stage for this pivotal adjustment, which could ease the financial burden on borrowers across the nation.
For savers, a rate cut might mean lower returns on savings accounts. However, borrowers could see a significant reduction in their debt payments, impacting everything from credit cards and mortgages to student loans. While the federal funds rate doesn’t directly dictate consumer costs, it influences a broad spectrum of borrowing expenses, including home equity lines of credit, auto loans, and credit cards.
In recent years, elevated interest rates have pushed the average rate on 30-year mortgages above 7%, a level not seen in decades. This has led to a substantial rise in borrowing costs for many financial products. In fact, housing affordability is now comparable to the peak of the 2008 housing bubble, largely due to the dramatic increase in mortgage rates.
If the Fed proceeds with a rate cut in September, it could potentially lower mortgage rates. Jacob Channel, a senior economist at LendingTree, suggests that while cuts to the Fed’s target rate might drive mortgage rates down, other factors such as bond market activities and inflation also play a crucial role. “We could see mortgage rates noticeably change while the Fed holds its target rate steady,” Channel explained.
Higher rates have also hit Americans with credit card debt hard. Average interest rates on credit cards have surged from 16% in February 2022 to 20.71% as of last week, according to Bankrate. Even minor fluctuations in credit card rates can significantly affect the amount owed by consumers. For example, a $5,000 debt at current APR levels would take about 277 months and $7,723 in interest to pay off if only minimum payments are made. In contrast, the same debt would have taken 269 months and $6,126 to pay off when interest rates were lower.
However, a 25-basis point cut by the Fed in September may not drastically lower these rates. Greg McBride, chief financial analyst at Bankrate, noted, “Absent a complete about-face from the economy, interest rates aren’t likely to come down soon enough, or fast enough, to provide meaningful relief to borrowers.”
On the flip side, higher rates have benefitted some consumers, particularly savers. During periods of elevated interest rates, banks and credit unions often raise their savings rates. This can be a boon for Americans, especially retirees relying on their savings. As of July 22, the national average banking savings rate was 0.45%, although some major banks offer as little as 0.01%. This is a decline from the 0.58% savings rate observed in early May.
For those looking for better returns, high-yield savings accounts offer a more lucrative option, with many paying between 4.2% and 5.27%. Savers can open these accounts online, but it’s crucial to ensure the bank is insured by the Federal Deposit Insurance Corporation (FDIC). According to Bankrate, there are currently more than two dozen nationally available savings and money market deposit accounts from FDIC-insured banks offering rates of 3.75% or higher.
However, these attractive rates could diminish once the Fed cuts its benchmark rate. McBride advises that now is an opportune time to secure competitive yields on certificates of deposit (CDs) and savings accounts, as these rates are likely to drop. “As we move closer to the initial Fed interest rate cut, yields on CDs and savings accounts will move lower,” McBride said. “Now is a great time to lock in the most competitive CD yields at a level that is well ahead of targeted inflation. There is no sense in holding out for better returns later.”
As the Fed prepares to potentially lower rates, the impact on both borrowers and savers will be closely watched. For borrowers, a reduction could bring relief from high-interest payments, while savers might need to act swiftly to lock in favorable rates before they decline.
