Snapshot: As of September 18, the Federal Reserve cut interest rates by .5%. Although consumers shopping for a mortgage may not see rates come down within the year, people shopping for auto loans or paying off credit card debt may see interest rates come down faster.
On September 18, 2024, the Federal Reserve announced that it was cutting interest rates by .5%. This is the first time the Fed has lowered interest rates since 2020. During that time, the Fed has been raising interest rates to keep inflation in check and prevent a recession.
Although half a percentage point may not seem like a huge cut, it is expected to have an impact and the Fed has indicated that more cuts may be coming later on.
What happens when the Federal Reserve cuts interest rates
In a nutshell, when the Federal Reserve cuts interest rates, it makes it cheaper to borrow money. Here’s how that can directly affect you:
- Lower Borrowing Costs: Banks can borrow money from the Fed at a lower cost, and they often pass those savings on to consumers. This means loans for things like cars, homes, or credit cards can have lower interest rates.
- Encourages Spending: When borrowing is cheaper, people are more likely to take out loans and spend money. This can help boost the economy because businesses benefit from increased sales.
- Investment Boost: Lower rates can also encourage businesses to invest in new projects since financing is cheaper. This can lead to more jobs and economic growth.
- Impact on Savings: On the flip side, lower rates can mean less interest earned on savings accounts, which might discourage people from saving money.
So, in short, when the Fed cuts interest rates, it’s aimed at stimulating the economy by making borrowing cheaper and encouraging spending and investment.
Will interest rates keep dropping?
It looks like rates will continue to drop: members of the Federal Reserve’s rate setting committee have said that they expect to see interest rates come down another half a percentage point in 2024 and then another full point in 2025.
How will this affect my debt?
The decrease in interest rates is most likely to have an immediate effect on APR – annual percentage rate. If you’re looking to take out an auto loan or a credit card, APR is what determines the interest on those lines of credit.
If you already have a car loan, this probably won’t affect you. Generally, the APR on a fixed-rate car loan does not change after you take out the loan. It remains constant for the duration of the loan term. However, if you have a variable-rate loan, the APR could change based on market conditions or specific terms outlined in your loan agreement.
If you already have a credit card, it is possible for the interest rates (APR) on your credit card to change even after you get the card. Many credit cards have variable interest rates that can fluctuate based on changes in the prime rate or other benchmarks. Check your card’s terms and conditions to understand how and when rates might change
Will the rate cut help mortgage rates?
Although the rate cut may not affect mortgage rates immediately, it might have more of an impact later on. As it is, mortgage rates have already shown signs of decreasing even before the Fed announced it was making cuts, dropping to an average of less than 6.05%.
If you’re thinking about buying a home, applying for an auto loan or getting a new credit card, lower interest rates could mean this is a better time than before. Before you apply for anything, make sure you check your credit to make sure that you’re ready to qualify for the best interest rates possible.
You can see your FICO score and a free summary of your credit profile with our Credit Snapshot tool.
Source: lexingtonlaw.com