Here are 4 ways lower interest rates could affect your personal finances
An interest-rate cut by the Federal Reserve could affect your finances in several ways
By Jeanne Sahadi, and Luciana Lopez, CNN
(CNN) — Federal Reserve Chair Jerome Powell hinted interest rate cuts could be coming soon in a speech on Friday, a move that could affect everyone from global markets to individual Americans.
Powell underscored that any upcoming rate cut would be dependent on the economic data. But Fed watchers took his comments to mean the central bank’s monetary policy committee may decide to lower them at its next meeting, in mid-September.
“While a September rate cut is highly probable, it is not a done deal,” cautioned Greg McBride, chief financial analyst at Bankrate.
Investors nonetheless welcomed the prospect of a rate cut, sending the Dow soaring 800 points on Friday to close at a record high.
Whenever the Fed does cut interest rates, here’s how it could affect your financial life.
Bank savings and CDs
When the Fed cuts its key overnight lending rate, lower rates on bank savings and loans tend to follow. But they may even start slipping a little in advance of any decision on your savings.
“Savings rates and CD rates will start to slide, and that will pick up speed as we get closer to the actual resumption of rate cuts,” McBride said.
Whatever happens with rates, one thing likely won’t change: You’re still likely to get the highest interest rates on your savings if you put your money in a high-yield savings account from an FDIC-insured online bank, which has to compete for deposits more fiercely than behemoths like Chase or Bank of America.
If you already have money in a CD at a good rate, that rate won’t change, and you’ll get the interest you signed up for. If you locked in a really high rate already and the CD is “callable,” it’s possible the bank may decide to recall it. If so, it will return your principal to you and whatever interest you’re owed to date.
Bank loans
Any loan you’ve already taken out with a fixed rate won’t change. Any new loan you’re seeking will likely have a lower rate than you would have seen if the Fed hadn’t cut.
However, unlike the anticipatory rate declines on the interest a bank has to pay you on savings, you’re not likely to see banks drop the interest rates you have to pay them before they have to.
When it is to the advantage of the lender, rates may be slower to move lower than consumers would like,” said Bobbi Rebell, a certified financial planner at CardRates.com.
Take new personal loans. “They tend to lag Fed rate cut changes to the downside,” Rebell noted. But, she added, as in any rate environment, “the stronger your credit, the more you are likely to see a better loan rate, because you are a more desirable consumer for the lender.”
Credit cards
Your credit card issuer will lower your variable rate, mimicking whatever rate cut the Fed makes, though there could be up to a three-month lag, McBride said.
But don’t expect to save a ton of money if and when it happens.
Why? Credit card rates are crazy high – the average is still 20.13%, per Bankrate. So a quarter to a half a percentage point cut won’t do too much for you if you carry a balance from month to month.
“The Fed has to cut rates a lot before it has a measurable impact on households. Remember, the Fed cut rates a full percentage point last year — and the average credit card rate is still over 20%,” McBride said.
In fact, you might have better luck just asking your card issuer for a lower rate. A Lending Tree report last year found that about three-quarters of card holders who asked for a lower rate were successful — by an average of 6.5 percentage points.
Your best bet, as always, is to keep trying to pay your principal down.
Mortgages
If you’re shopping for a home or looking to refinance your mortgage, it’s not clear how influential a Fed rate cut will be on its own.
Mortgage rates are not tied directly to Fed moves, but rather to moves in the yield of the 10-year US Treasury note. And that yield is influenced by a host of economic expectations.
“Inflation, debt and deficits have kept mortgage rates elevated and will likely limit the extent that mortgage rates come down,” McBride said. “Unless the economy starts to keel over, we probably won’t see mortgage rates moving sustainably below 6%. Not for a while.”
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CNN’s Luciana Lopez contributed reporting.
