The Federal Reserve recently announced a quarter-point cut to its benchmark interest rate, a move that aims to provide financial relief amid ongoing inflation challenges. Millions of Americans are still dealing with the aftermath of high inflation. Higher costs for those same goods and services continue to strain household budgets. The effect of this rate cut, though, is likely to be complicated, as inflation continues to be a high priority.
As economist Brett House, a professor at Columbia Business School, noted, inflation doesn’t hurt all wallets equally. He stressed just how much these effects can vary. Even as we welcome some families with reduced overall borrowing costs, for many families the larger trend of rising prices will continue to pinch budgets. In particular, retirees are contending with what has been called their “greatest enemy”—inflation—which wilts away their earned, fixed income.
As noted by Bankrate earlier this month, the average interest rate on a credit card has now climbed over 20%, close to an all-time high. This elevated rate adds to the overall financial burden so many households are feeling, worsening the impacts of elevated inflation rates. Additionally, credit scores have dropped for a second straight year, a trend that only further constrains borrowing ability.
In response, the Federal Reserve has repeatedly cut interest rates. This change will go a long way towards lowering the excessively high borrowing costs that consumers have been suffering under. For prospective car buyers, the cut could result in reduced auto loan rates, putting car purchases within reach for more people. The average rate is 7% for a five-year new car loan, reports Edmunds.
While this is good news for existing borrowers, other financial products are still difficult to obtain. Costs have retreated some, but fixed mortgage rates, including the popular 30-year fixed, remain well above year ago levels. The average has been gradually creeping down and currently sits at 6.13%. That’s a big improvement — a decline from more than 7% in January — but still worse than it was a year ago. Selma Hepp, an economist at CoreLogic, stated:
“The Federal Reserve rate cut this week has already been priced into mortgage rates, so the immediate impact will be minimal.”
In her testimony, she noted that one cut wouldn’t significantly reduce rates. If future cuts are larger than currently indicated, we may see mortgage rates decline.
For already-existing homeowners seeking to refinance out of higher-interest mortgages, there is better news to report. As interest rates have dramatically fallen, mortgage refinance demand has spiked almost 60%. This increase represents a huge wave of pent-up demand among homeowners eager to refinance into lower borrowing costs.
If for borrowers, we reserve the loudest cheer, for savers we must do the opposite. At more than 4% return, high-interest savings accounts and CDs counteract inflation’s bite pretty well right now. Matt Schulz, chief credit analyst at LendingTree, warned:
“Rate cuts are good for borrowers but tough on savers.”
He signaled that savers should start getting used to locking in today’s still-high rates before they drop even more. Despite the immediate benefits for borrowers, Schulz expects yields on savings accounts and CDs to decline as the Fed cuts rates further:
“Expect yields on high-interest savings accounts and CDs to drop.”
This new economic picture is a confusing one for many American households. If you’re carrying a variable-rate loan or any kind of credit obligation, you’ll start to notice your interest rates decreasing fast. The Fed is making the moves that are causing these increases in borrowing costs.
We know that inflation has been a painful burden across Americans’ pocketbooks. In turn, the Federal Reserve is attempting to navigate continued economic growth with the countervailing effects of increasing costs. It’s the interplay between interest rates and inflation that will, in all likelihood, make or break how much good these changes do for consumers in the months ahead.