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What another Fed rate cut would mean for consumers

Online Niel November 7, 2024

The Federal Reserve will cut interest rates again this week, but the cut may be so small that consumers may hardly feel it, analysts said.

When the Fed concludes its policy meeting on Thursday, most economists expect the Fed to cut its short-term benchmark federal funds rate. by a quarter of a percentage point between 4.50% and 4.75%. It would be the Fed’s second rate cut in a row, but smaller than this one cutting to half point in September which started the rate cut cycle.

Consumers and businesses benefit from lower rates because they allow people to spend and invest at a lower cost, but analysts said until the Fed delivers a slew of rate cuts, it will likely feel little relief.

“Consumers likely won’t feel much of the impact of this cut,” said Elizabeth Renter, senior economist at personal finance tools website NerdWallet. “It is the cumulative downward journey that will slowly ease the financial pressures on households, especially those carrying debt.”

What can consumers expect this holiday if they shop on credit?

Still skyrocketing interest rates on credit cards and personal loans, said Matt Schulz, chief credit analyst at comparison site LendingTree.

“This is especially true with store credit cards,” he said. “Anyone applying for these types of cards should brace themselves for a possible 30% APR, even if you have amazing credit.”

Average credit card rates in November fell for the second month in a row to 24.61 percent, but are still not far from September’s record high of 24.92 percent, according to LendingTree data.

“Unless the Fed dramatically accelerates the pace of its rate cuts, it’s going to be a while before those cuts add up to more than just a few dollars a month coming off your bill,” Schulz said.

To demonstrate how credit card payments would change to different annual percentage rates (APR)consider if you owe $5,000 on a credit card,

At a rate of 24.61% and paying $250 each month, it will take 26 months and $1,501 in interest to pay off the balance.
Drop the rate by half a point to 24.11%, and it will take 26 months and $1,459 in interest to pay off the balance. That’s a savings of $42 in interest, or about $1.50 per month.

“Borrowers should understand that ‘falling interest rates’ is not the same as ‘low interest rates,'” said Greg McBride, chief financial analyst at comparison website Bankrate. “On the contrary, as interest rates are high and will only drop to ‘not so high’ as 2024 approaches and we move into 2025. The urgency remains to pay down high-cost debt and use 0% or other reduced rate balance transfer offers to turbocharge credit card debt repayment.”

Will mortgage rates go down?

Mortgage rates can be influenced by Fed moves, but are affected by many other factors such as inflation, cost of borrowing, bond yields and risk.

After the Fed cut rates in September by half a percentage point, mortgage rates have gone up after a series of strong economic data. Consumer spending, economic growth and even the the labor market it holds up well.

When the economy is strong, investors have less reason to buy safe Treasuries, so their prices fall. Yields move in the opposite direction to prices.

While a quarter-point Fed rate cut on Thursday might not have a big impact on mortgage rates or stimulating the real estate marketthe long-term outlook for interest rates and mortgage rates is that they will fall, analysts said.

“Continued rate cuts could begin to reduce mortgage rates, which have remained stubbornly high,” said Michele Raneri, vice president and head of U.S. research and consulting at credit agency TransUnion. “This may help motivate more potential homebuyers who have been put off by relatively high mortgage rates. It could also begin to stimulate the refinancing market, particularly among those borrowers who recently took out a higher interest rate mortgage.”

Will car loan rates go down?

While a Fed rate cut will bolster the view that auto loan rates will fall, it could take time, analysts said.

So far, “there has been little change in average auto loan rates since the Federal Reserve cut interest rates in September,” said Jonathan Smoke, chief economist at researcher Cox Automotive.

Auto loan rates, like mortgage rates, are also influenced by other factors, such as bond yields and delinquency rates.

Delinquency rates on car loans increased substantially above pre-pandemic levels by the end of 2023, after falling to historic lows during the COVID-19 health crisis, The Federal Reserve said in September.

When auto loan rates start to fall more sharply, consumers may switch to refinancing in the coming months, Raneri said.

Will the stock market grow?

If the Fed commits to more rate reductions to support the labor market, which some economists think it will, some economists think the stock market will continue to rise.

“With the Fed drawing a line in the sand hourly Unemployment rate of 4.3%. (with the aggressive half-point rate cut in September), wage gains are likely to remain around 4%, ensuring another year of above-trend (economic) growth in 2025,” wrote Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA, in a report.

A strong economy would generate additional revenue for S&P 500 companies, which would boost company earnings and stock prices, he said.

Because a general uptick in the economy benefits all sectors and industries, Ricchiuto said he expects stock gains to outpace a handful of companies next year.

This could bode well for people’s 401(k). and other retirement savings, analysts said.

Is it still a savior’s paradise?

Despite the drop in rates, analysts say savers can still go ahead.

“The fact that interest rates went up the elevator in 2022 and 2023 but will come down in 2024 and 2025 is better news for savers than borrowers,” Bankrate’s McBride said. “Yes, interest earnings on savings accounts, money markets and certificates of deposit will decline, but the most competitive yields still beat inflation.”

Nerdwallet’s Renter suggests consumers lock in some decent ones installments on certificates of deposit (CD).

“A CD allows you to get the bigger return if you can afford to put your money out of sight for a term,” she said.

As of November 1st, CD Valet listed 295 CDs with an annual percentage return of 5% or more across all maturities.

Medora Lee is USA TODAY’s money, markets and personal finance reporter. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance advice and business news every morning Monday through Friday.