Fed’s Rate Cut: What It Means for Your Wallet
The Federal Reserve’s latest interest rate cut will have far-reaching consequences for consumers and businesses alike. With inflation still a concern and the potential impact of President-elect Donald Trump’s policies on the economy, the Fed is taking a cautious approach, indicating that future rate cuts may be fewer and farther between.
A Gradual Pace of Rate Cuts: What It Means for Borrowers
For those hoping for significantly lower loan rates, the news may be disappointing. The Fed’s plan to cut its key short-term rate only twice next year may not lead to substantial changes in loan rates. “This could be the last cut for a while,” said Jacob Channel, senior economist for LendingTree. The Trump administration’s policies may cause a resurgence in inflation, prompting the Fed to take a wait-and-see approach and hold rates steady.
Credit Card Debt: A Drop in the Bucket
The latest rate cut may not bring much relief to those struggling with credit card debt. A quarter-point reduction may only knock a dollar or two off monthly debt payments. The average annual percentage rate on a new credit card offer remains high, at 24.43%. While further modest declines are possible, cardholders should not expect a significant decrease in rates.
High-Yield Savings Accounts: Still a Good Option
For savers, high-yield accounts may still be worth exploring, despite returns dropping in tandem with the Fed’s rate cuts. Some accounts offer yields at or near 5%, still higher than traditional bank rates. “Yes, you’ve missed the peak rates seen a few months ago,” said Matt Schulz, chief credit analyst at LendingTree. “But even at these levels, they’re still likely higher than what you’ll find at a traditional bank.”
Mortgage Rates: Will They Ease?
The Fed’s rate cuts can indirectly influence mortgage rates, which track the yield on the 10-year Treasury note. While mortgage rates have declined recently, they remain above their 2024 low. For people with fixed mortgages, their rate won’t change unless they refinance or sell and move.
Auto Loans: Reflecting Lower Rates
The effects of the Fed’s recent rate cuts have been passed through to auto loans, which have fallen on average from 7.3% in July to 6.8% last month. This drop has helped more people afford new vehicles, contributing to a buying spree in November. However, increased demand has also boosted average prices and monthly payments to record levels.
The Fed’s Balancing Act
The Federal Open Market Committee must balance the need to cut rates to support the economy with the risk of inflation resurgence. “The Fed is designed to pivot relatively quickly should something unexpected happen,” said Channel. If the economy shows signs of deterioration, we could see bigger and more frequent cuts over the next 12 months. On the other hand, if inflation spikes, rate cuts might be moved off the table.
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