The Fed’s expected jumbo rate cut

Fed governor Miki Bowman, who is among the most hawkish on the FOMC: "I am not confident that inflation will decline in the same way as in the second half of last year."

She keeps the door open to a rate cut: "Should the incoming data continue to show that inflation is moving…

— Nick Timiraos (@NickTimiraos) August 10, 2024

The Federal Reserve’s first interest rate cut in four years might be on the horizon, potentially happening as soon as September. While the cut would impact consumers, the extent of its effects could vary significantly. Lower yields on deposits but better terms on credit cards are two possible outcomes of the anticipated Federal Reserve interest-rate cut. However, this move might not significantly benefit consumers unless followed by a series of cuts.

U.S. Banks Facing $517 Billion of Unrealized Losses 🚨 – nobody wants interest rate cuts more than them pic.twitter.com/NOt77O7Uen

— Barchart (@Barchart) August 11, 2024

While any interest-rate reduction is positive, it’s important to note that the extent of these positive impacts can vary based on how quickly banks and financial institutions pass on the lower rates to consumers,” said Jim Triggs, president and CEO of Money Management International. He added that people with poor credit scores, in particular, might not be able to take advantage of refinancing opportunities. The Fed hasn’t cut rates since March 2020, during the early days of the COVID-19 pandemic.

There are many people cheering for Fed Cuts, but it all boils down to whether we get a recession. If we don't, stocks are likely off to the races, but if we do, look out below. pic.twitter.com/wgeZdGPAxU

— Barchart (@Barchart) August 9, 2024

Since then, the Central Bank has raised rates by a combined 5.25 percentage points to slow the economy and keep inflation under control. While economists debate whether these measures have been sufficient, the economy appears to be cooling, making one or two rate cuts probable. Fed actions primarily influence short-term interest rates and don’t directly affect long-term rates, such as those on 30-year fixed mortgages, which track 10-year Treasury notes. Mortgage rates have been rising in recent years due to inflation concerns, though they have started to ease and may fall further if the economy slows. “Sales of existing homes have dipped to their lowest level since 2010, as homeowners with low-rate mortgages are staying put,” wrote Jack Ablin of Cresset Capital Management. Lower mortgage rates would boost sellers and make homeownership more affordable for buyers.

Fed cuts: potential impacts on consumers

If the Fed proceeds with a series of rate cuts, it will allow people to refinance existing debts. However, this trend will work against savers using deposit or money-market accounts. Greg McBride, Bankrate’s chief financial analyst, advises locking in current yields on certificates of deposit if you can. Waiting has no advantage, as yields will trend lower as we get closer to the first Fed rate cut. Already, yields on CDs have started to decline. Rate cuts alone might not significantly reduce monthly debt payments for consumers struggling with high debts. “The principal amount owed can still be overwhelming,” noted Triggs. Consumers with low credit scores might not qualify for new loans or refinancing options. A Bankrate survey indicated that consumers with credit scores below 670 on the FICO scale might not benefit significantly from lower rates. Additionally, a cooling economy might adversely affect job prospects, although unemployment remains at 4.3%. Money Management International saw a 52% increase in new credit-counseling clients in the first half of 2024 compared to last year. New clients carried an average unsecured debt of $28,000. For some, Triggs recommends debt-management plans that incorporate budgeting, prioritized debt-payment strategies, professional financial guidance, and negotiations with creditors. While interest-rate cuts can provide some relief,” Triggs said, “a comprehensive approach that includes debt-management strategies and financial education is often needed for consumers to achieve long-term success.