Fed Rate Cut Effects Include Cheaper Credit, More Spending
What are likely Fed rate cut effects? This week the Federal Reserve Board, or Fed, cut its interest rate by .5 percent. That’s a fairly big cut, and it’s the first one in four years. But how does it affect YOUR bottom line?
What Does the Fed Do?
The Federal Reserve Board is the United States’ central bank. Its main responsibilities are setting interest rates, managing the money supply, and regulating financial markets. The interest rate the Fed sets affects the overnight interest rate banks use when they borrow money from each other. In turn, that rate change affects all sorts of commercial and personal interest rates.
In response to inflation that began in 2020, the Fed raised interest rates. The idea is that higher interest rates discourage spending. That lessens demand, which puts pressure on prices to stay the same, or even go down. The higher rates of the last few years have helped bring inflation under control. Hence the rate cut. Conversely, lower interest rates encourage spending and overall economic growth.
Fed Rate Cut Effects on Mortgages, Housing Market
Perhaps anticipating a Fed rate cut, mortgage rates have already fallen lower. Unfortunately, that will unlikely have any effect on housing prices. The nation’s housing supply can’t keep up with demand. Mortgage rates aren’t likely to reach the lows of four years ago anytime soon. So if you have a low-rate mortgage, you may want to put off refinancing.
Effect on Auto Loans
Another of the Fed rate cut effects should result in lower interest rates on auto loans. That, in combination with increasing inventories after pandemic-induced supply shortages, should mean some better deals for car buyers.
Effect on Credit Cards
The Fed interest rate has the biggest effect on high-interest credit cards. If you’re looking for savings on credit card debt, you’re better off transferring high-interest balances to a 0 interest card deal. Another approach is taking out a personal loan with a lower interest rate.
Effect on Savings
The higher Fed rates of the last few years have meant that savings accounts and CDs have earned more interest than they have in years. While the rates on those accounts won’t go down immediately, they will start trending down soon. Especially because economists anticipate further Fed rate cuts in the months ahead. Best to lock in a higher-rate CD sooner rather than later.
Effect on Jobs
With loans more readily available, businesses can more easily expand. That often translates to more hiring and job creation. But job growth, along with increasing inflation, can make the Fed nervous. And that can mean rates going back up.
Links
The Fed looks closely at the Consumer Price Index for making inflation-based decisions.
Bankrate has a handy tool to compare up to three credit cards at a time.
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