By Ian Salisbury
Sept. 16, 2024
The winds are about to shift in the economy, with short-term interest rates set to decline for the first time in years.
For millions of Americans that will make it harder to earn attractive yields on savings. But there will be winners too: Mortgages, credit cards, and other loans could all become significantly cheaper.
A person counts U.S. dollar banknotes. Photographer:
On Wednesday the Federal Reserve, which has been keeping interest rates high to fight inflation, is widely expected to reverse course. Wall Street expects either a quarter- or half-percentage point cut to the benchmark federal-funds rate, which currently stands at 5.25% to 5.5%.
While that may sound small, it represents a big change in attitude, signaling policymakers are less concerned about inflation and more worried about the economy. Wall Street expects the Fed to ultimately cut its short-term rate to 3% or less by this time next year.
Lower interest rates could help spur stock and bond prices, although both have already posted big rallies this year. But there will be plenty of impact on consumers outside of financial markets, too.
Interest rates and savings and CDs are expected to decline quickly after the Fed acts, giving these investors a big incentive to lock in today’s rates if they can. At the same time, strapped credit card borrowers will enjoy at some relief, and recent home buyers saddled with expensive mortgages will have the chance to hunt for better deals.
Here’s how the Fed’s upcoming move could impact your wallet.
Savings accounts and CD rates
If you have money in a high-yield savings account, or similar cash vehicle such as Treasury bills or a money-market fund, now may be the time to act. Savings accounts closely follow short-term interest rates. While investors can still score yields 5.25% or better, rates at many top banks have already started to tick down, according data from rate aggregator DepositAccounts.
One obvious alternative is certificates of deposit. John Blizzard, founder of rate aggregator CD Valet, says savers who previously focused on 1-year CDs have been seeking longer-term certificates.
“There’s been a big shift in consumers looking at 2-, 3-, 4-, 5-year rates, even though the rates are lower in general,” Blizzard says.
Top 3-year CDs currently pay around 4.5%, according to CD Valet. While investors who move money from a savings account or money-market fund will sacrifice some yield in the short run, the move could pay if the Fed cuts rates as sharply Wall Street expects.
Of course, CDs typically require you to lock your money away for the certificate’s term, which isn’t always an option. One alternative is to build a CD ladder, which involves buying several CDs with staggered maturities, such as 6 months, 12 months, and 18 months. That allows you to lock in current interest rates, while never being more than a few months from access to at least some of your money.
Another option: If the money is for emergencies, simply resolve to break the CD if it turns out you truly need it. The penalty for breaking a 3-year CD is typically six-months’ interest—about $225 on a $10,000 investment at today’s interest rates. Frustrating, sure, but far less than interest you would likely forgo if savings accounts drop and you end up not needing the money.
Mortgage rates
It is no secret home buyers have been frustrated by mortgage rates. Even a small increase in rates can add hundreds of dollars to the monthly cost of owning a home. Last year, average 30-year mortgage rates hit nearly 7.8%, their highest level in a generation.
Short-term interest rate cuts should provide relief to would-be home buyers and recent home buyers looking to refinance out of burdensome loans. But there is a caveat. Because most mortgages are long-term fixed-rate loans, today’s rates tend to anticipate where investors think rates will be several years from now.
Today’s average 30-year rate has already declined to 6.2%, well below last year’s peak. It isn’t clear how much further rates have to fall. One way mortgage rates could still decline sharply is if the economy slows and the Fed is forced to make deeper-than-expected short-term rate cuts to spur growth, says Keith Gumbinger, vice president of mortgage website HSH.com. While that might mean cheaper mortgages, it would pose other problems for consumers.
Absent that, Gumbinger says mortgage rates could still drift down, but the pace would be gradual. Assuming the federal-funds rate ends up in the 3% to 3.5% range next year, Gumbiner says his working guess is that mortgage rates will end up around 5.5%—about where they were in 2008, the last time short-term interest rates were in the same range.
Still, housing experts stress it is foolish to put off life decisions such as buying a home based on fast-changing interest-rate forecasts. If you are in that situation, it makes sense to act now.
If you bought a home in the past few years, it is also worth checking rates to see how much you would save if you refinance today. While refinancing involves upfront costs, a rule of thumb suggests that homeowners who can lower their rates by 0.5 to 1 percentage point come out ahead.
Mortgage data company Black Knight estimates there are more than three million homeowners who stand to benefit from refinancing at today’s rates. If the average 30-year mortgage rate drops to 6% in coming weeks, the number could reach nearly five million.
Credit card interest rates
Americans are struggling with credit card debt, and lower interest rates should bring some quick relief. Still, rates are still likely to remain historically high, even after the Fed acts. Consumers who carry balances will need to take proactive stops to pay them off.
Credit card borrowers have faced a double whammy. Balances swelled dramatically in the past few years, hitting $1 trillion for the first time last August. Interest rates have also been at record highs. Today’s average interest rate is more than 21%, according to Fed data—up from less than 15% just a few years ago.
Many credit card rates are directly pegged to short-term interest rates, so borrowers should see the rates they pay follow the Fed’s rate cuts step by step, according to Greg McBride, Bankrate chief financial analyst.
“Your credit card rate will drop within two or three statement cycles,” he says.
Unfortunately, with interest rates at more than 20%, a cut that amounts to a quarter of a percentage point, or even two full percentage points, won’t make a huge difference to most borrowers. (A $3,000 balance costs $52 a month at a 21% interest rate and $47 a month at a 19% interest rate.)
“Interest rates aren’t going to come down fast enough to bail you out,” McBride says. “So you’ve got to really put the hammer down on paying down that debt.”
One shortcut he recommends: If you have a strong credit score (670 or higher) you may qualify for a balance-transfer credit card. These cards typically allow you to transfer credit card debt from other cards (for a fee) and give you a window of a year or more to pay it off interest-free.
Write to Ian Salisbury at ian.salisbury@barrons.com
This Barron's article was legally licensed by AdvisorStream.
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