- The Federal Reserve is widely expected to announce another quarter-point interest rate cut this week.
- Despite the move, experts warn that many consumer loan rates, particularly for credit cards and mortgages, may see little to no change.
- Short-term variable rates on products like HELOCs are most affected, but the relief for high-interest credit card debt will be minimal.
- Long-term fixed rates, such as 30-year mortgages, are less influenced by the Fed’s benchmark and more by broader economic factors.
Another Fed Cut Looms, But Borrowers Shouldn’t Celebrate Yet
The Federal Reserve is expected to lower borrowing costs again on Wednesday, marking its second consecutive rate reduction. The anticipated quarter-point cut would bring the federal funds rate to a range between 3.75% and 4.00%. However, for the millions of Americans with credit card debt, auto loans, and mortgages, this news may not bring the financial relief they are hoping for.
While the federal funds rate influences the entire financial system, its effect on consumer pockets isn’t always direct or immediate. Experts caution that many of the rates that directly impact households are unlikely to budge significantly, leaving many borrowers stuck with high costs.
H3: Why Your Rates Might Stay High
When the Fed hiked rates throughout 2022 and 2023, consumer loan rates shot up quickly. Now, as the central bank reverses course, the decline is proving to be much slower. “The Fed is not cutting every single interest rate that exists in the world,” explained Mike Pugliese, senior economist at Wells Fargo Economics.
The impact depends heavily on the type of loan. Short-term, variable-rate loans are more closely tied to the Fed’s benchmark, while long-term, fixed-rate loans are influenced by other factors like Treasury yields and the overall economy.
H4: Credit Card Debt: From ‘Awful to Amazing Overnight’ Is Not Happening
With nearly half of American households carrying credit card debt at an average interest rate above 20%, any relief would be welcome. Unfortunately, the upcoming Fed cut will barely make a dent. Since credit card rates are tied to the prime rate, they will adjust, but the reduction will be small. For a borrower with a $7,000 balance, a quarter-point APR reduction would only save about $61 over the life of the loan.
“Even if the Fed steps on the gas in the coming months when it comes to rate cuts, credit card rates aren’t going to go from awful to amazing overnight,” said Matt Schulz, LendingTree’s chief credit analyst.
H4: Slight Relief for Car and Home Buyers
The outlook is similarly mixed for those looking to buy a car or home. Auto loan rates, which are typically fixed, won’t be directly affected. While lower rates could boost buyer sentiment, they “won’t dramatically slash monthly payments for consumers,” according to Jessica Caldwell at Edmunds.
Long-term fixed mortgages, like the popular 30-year option, are also insulated from the Fed’s day-to-day moves. However, some home loans will see a more immediate impact. Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are pegged to the prime rate, meaning borrowers with these products will see their rates come down soon after the Fed’s decision.
For most, however, the era of high borrowing costs is far from over, and this week’s anticipated rate cut is unlikely to change that reality.
Fed is on track to cut rates in October and December, says Evercore ISI’s Krishna Guha
CNBC Housing Market Survey finds most homebuyers expect mortgage rates to come down further