The Federal Reserve Open Market Committee concluded its July meeting, leaving the Federal Funds rate at its present level of between 5.25% and 5.50%. But the Fed policymakers hinted that the first rate cut in years could come in September.
While Wall Street has been hoping for a cut for many months, it’s less clear what the impact on consumers would be. Ben McLaughlin, U.S. president of Raisin, a financial services firm, says one of the most immediate effects would be a decline in credit card interest rates, which are at a record high.
“As the federal funds rate drops, so does the prime rate and consumers can expect to see the impact of this on their statements within a billing cycle or two,” McLaughlin told ConsumerAffairs.
Brian Shahwan, a banker and broker at William Raveis Mortgage, says cuts in the federal funds rate would bring down the interest rates on car loans and home equity lines of credit (HELOC). He also thinks it could help people who want to buy a home.
Mortgage rates could fall
“Although mortgage rates are not directly tied to the federal funds rate, they often follow the same trajectory,” Shahwan told us. “This means that once the Fed begins cutting, we will absolutely see mortgage rates dropping as well.”
In fact, Shahwan says that since they are not directly tied to each other, mortgage rates could see dips, just with the implication that the Fed might cut soon--even if they haven't begun cutting yet.
Steve Hill is in the mortgage banking industry at SBC Lending. He agrees that Fed rate cuts have an indirect effect on mortgage rates, but he notes that mortgage rates are set by lenders, not the Fed.
“However, mortgage lenders are very much influenced by the direction they think the Fed is going,” Hill said. The Fed cutting rates would be a huge indication that we truly are near the end of the rate hiking cycle, and that bit of positive news about the future would have a big impact on mortgage rates."
Less interest on bank deposits
The only downside for consumers is if they have money parked in bank CDs. Those savings instruments have been paying between 5% and 6% after years of rates mostly below 1%.
McLaughlin says rates on bank deposits would probably go down, but not right away.
“How banks determine CD rates depends on several factors,” he said. “Yes, rates typically change with Fed decisions, but they are also a function of how a bank is managing its balance sheet at any given time. If a bank is looking to increase its deposits, it will offer a more competitive rate to entice customers.”
For consumers who want to keep their money in CDs, McLaughlin says falling rates could be good news. He notes that for the last year or so, short-term CDs have paid more than long-term deposits. In a falling interest rate environment, he says things will return to normal, with longer-term CDs paying higher rates of interest than short-term deposits.