What the Fed’s Rate Cuts Mean for Your Money

CNN
—

The Federal Reserve lowered its key overnight lending rate again on Thursday, after lowering it by half a point in mid-September.

Fed watchers also expect the central bank to cut interest rates once more this year, by another quarter point, at its December meeting.

If so, that would mean the fed funds rate, which directly or indirectly affects interest rates on a wide range of consumer savings and lending products across the economy, would have fallen by a full percentage point by the end of the year.

But that does not mean that interest rates are now low – or will soon be low. “‘Falling interest rates’ is not the same as ‘low interest rates.’ Interest rates are high and will only drop to ‘not that high’ as ​​… we move into 2025,” said Greg McBride, financial analyst at Bankrate.

Here is an overview of how far rates have fallen on your savings, loans and investments, and what experts see going forward.

The interest rate environment is still not much kinder to those carrying debt.

Credit card: Just before the Fed lowered its key interest rate in September, the average credit card interest rate was 20.78%, according to Bankrate. This week it had fallen to just 20.39%, less than half a point.

That’s still well above the 16.3% average rate recorded at the start of 2022, before the Fed began raising rates to beat back inflation. So even if the Fed continues to gradually lower interest rates over the next two years, carrying credit card debt will continue to be the most expensive debt you carry.

Therefore, you will always receive the same advice in any price environment. Pay off your credit cards as soon as you can. If you qualify, try to find a balance transfer card that will offer you up to 21 months at 0% interest and pay off as much of your principal in that period as possible.

“Using a 0% balance transfer credit card or low-interest personal loan to lower your interest rates and consolidate your debt can have a much bigger impact on your debt load than anything the Fed will do,” said Matt Schulz, chief credit analyst at LendingTree.

Another option: Try transferring your balance to a credit card from a credit union or local bank. They may offer fewer perks but typically have lower prices, said certified financial planner Chris Diodato.

mortgage loan: Since the Fed started lowering interest rates, mortgage rates have actually risen.

That’s because they’re directly tied to movements in the 10-year Treasury yield, which typically moves on economic factors like inflation and growth and interpretations of the Fed’s future moves. Since the latest data has come in strongly, the 10-year has risen higher since mid-September.

As a result, the average interest rate on a 30-year mortgage hit 6.79% per annum. Nov. 7, above the 6.2% recorded a week before the Fed’s September meeting. Nevertheless, it’s still well below where it was a year ago, when the average hit 7.50%, according to Freddie Mac.

In the wake of the US presidential election, Sam Khater, Freddie Mac’s chief economist, indicated that he expects some near-term risk that mortgage rates could move higher because political uncertainty is now high.

The fact that consumer interest rates have not yet fallen very much – and in some cases not at all – benefits savers.

“Interest income on savings accounts, money markets and certificates of deposit will decline, but the most competitive returns still exceed inflation,” McBride said.

Savings accounts: Traditional savings accounts continue to provide paltry returns, well below 1%.

The best returns on cash savings are in online high-yield savings accounts at FDIC-insured banks. Before the Fed’s rate cut in September, many of these accounts offered interest between 4.25% and 5.3%, according to those listed on Bankrate.com. On Thursday, offered rates had fallen by a quarter of a point or so, ranging between 4% and just over 5%, well above the latest inflation gauge of 2.1%.

Certificates of deposit: FDIC-insured CDs also still offer inflation-beating returns. Before the last Fed meeting, CDs listed on Schwab.com with terms ranging from three months to 10 years offered annual interest rates between 3.65% and 4.99%. On Thursday, the range was 4.25% to 4.60%.

Bonds: If you live in a high-tax area, consider putting some cash into Treasurys, which are not subject to state and local taxes; or to high-quality municipal bonds, which are typically exempt from federal tax, and sometimes state and local taxes as well.

Short-term Treasuries (with maturities of three months to one year) yielded 4.32% to 4.54% Thursday on Schwab.com. And government bonds (with maturities of two to 10 years) yielded between 4.19% and 4.35%. That’s well above where they were back in mid-September, when the two- and 10-year notes were at 3.6% and 3.64%, respectively.

Muni rates, meanwhile, have held up even in the face of Fed rate cuts because more of them have come online in the run-up to the U.S. election, said Sinead Colton Grant, chief investment officer at BNY Wealth.

Given expectations that the Fed is likely to continue cutting interest rates next year, Colton Grant said, “We prefer bonds, especially as cash yields will move lower.”

But she expects volatility in bonds, which is why she prefers active management of the fixed-income portion of your portfolio over the next year — whether that’s through a separately managed account in your 401(k) or through an actively managed bond fund.

Making money in a very low-risk way to your cash is easy and gratifying when rates are high. But when they start to decline in the next year, you lose a lot of other gains.

Diodato now warns his clients against falling into what he calls the “cash trap” and keeping too much money in the savings and money markets because it can hurt your net worth over time, as stocks and bonds have largely outperformed cash dividends.

That’s why, unless you’re already in or close to retirement, he wouldn’t recommend keeping more than six months to a year’s worth of living expenses in cash or liquid funds.

And Colton Grant urges sticking with an overall well-diversified portfolio regardless of who wins the US presidential election, because stocks will still be primarily driven by earnings and interest rates. For example, she said, BNY has been overweight U.S. large-cap stocks because of their strong free cash flow and productivity gains from AI.

“When you look over time at how stock markets have performed under different administrations, they’ve performed well under all environments,” she said.