Americans juggle many interest rates in their daily lives. They pay interest on car loans, credit card credits and mortgages. They earn at least a little interest on the money they save at banks.
Technically, the Federal Reserve officials did not hit any of those rates when they announced a quarter-point rate cut on Wednesday, the first cut in a decade. The rate they have lowered is the rate of the federal funds, which banks and other financial institutions charge each other for very short-term loans.
Most consumers do not spend that kind of overnight stay, but the Fed’s movements still affect the borrowing and savings rates that they encounter every day.
The effect is not always immediate or immediate, so consumers will probably not wake up Thursday to discover that all their favorite rates have changed by a quarter point. There is even solid evidence that the mere expectation that the Fed would lower rates on Wednesday has already lowered some of the most important rates that consumers pay.
One of the biggest possible consequences of the Fed’s cut is perhaps one that you don’t see: facing a recession. If the move works, this can prevent the economy from weakening and prevent layoffs and other economic damage that can harm employees and consumers.
Here you can see the effects of the cut.
Your savings account
When the Fed maintained almost zero years after the 2008 financial crisis in the hope of creating growth and employment, there was in principle no financial incentive to save money at a bank. By the end of 2015, the average one-year deposit certificate according to Bankrate.com yielded an annual return of just over 0.25 percent.
Fed officials have since raised interest rates nine times, each by a quarter point. The increases have lifted savers, although not so much. The average yield on a year C.D. cracked 1 percent this year. But since then it has fallen, just like the average yield on five-year C.D., amid larger indications from Fed officials that an interest rate cut was in the works. The trend could continue.
Savers looking for a higher return can consider online savings accounts, which in many cases still pay returns of 2 to 2.5 percent. Some accounts require a minimum balance, but that is sometimes as low as $ 1.
If you borrowed money to buy a house at the end of last year, you were out of luck – and that cost you. When the Fed approached in November what seemed to be the end – at least for the time being – of its slow march of interest rate increases, the average interest rate on a 30-year mortgage was nearly 5 percent. It has since fallen to 3.75 percent.
The slide was tied to the expectation that the Fed would lower interest rates, said Greg McBride, Bankrate.com’s leading financial analyst, and for consumers this is probably the most likely consequence of the Fed’s shift in policy.
It is probably also fully priced, unless the Fed has a strong hint that there will be more interest rate cuts.
“Mortgage interest is tied to long-term interest, so they start well in advance,” McBride said. “Any further movement of the mortgage interest rate will be linked to the outlook.”
Historically, mortgage interest rates do not have to fall much further. In the last half century, the average percentage over 30 years has never fallen below 3.3 percent.
Your Borrowing and Spending
One interest rate that has increased by as many percentage points in recent years as the federal funds rate is the one that you probably want to stay lower: the average interest rate on credit card debt. It is now almost 18 percent and, unlike savings and mortgage rates, it has not fallen in recent months. That probably means you shouldn’t expect it to fall immediately after Wednesday’s cut.
The rates for car loans have risen since 2016, but they have fallen slightly this year. After a peak of nearly 5 percent at the end of last year, the rate of the average five-year loan for a new car is now just under 4.75 percent, according to Bankrate.com. Like the rates on credit cards, the rate for car loans is not always in line with the Fed: it fell in 2016, even when the Fed raised rates.
These rates help in part to explain why most economists do not expect a single interest rate cut by the Fed to be sufficient to change consumer spending habits.
“The impact on the household budget of a single interest rate cut is not important,” said Mr. McBride. “It’s not like it will unleash a flurry of consumer activity”
In the context of your financial life, of course, what you pay to borrow – or what you get to save – usually takes a back seat for more fundamental questions about how much you can work and earn. These questions seem to be in the minds of the Fed as they lower rates.
“It is better to take preventative measures than wait for the disaster to unfold,” said John Williams, president of the Federal Reserve Bank of New York, two weeks ago in comments that were generally interpreted as a signal that the interest rate cut was on the way.
In other words, by lowering rates, now and possibly this fall, policy makers are trying to reduce the risk of millions of Americans becoming unemployed. They try to avert the prospect of a job-destroying recession by stimulating the economy a little extra.