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The Federal Reserve revealed on Wednesday its decision to reduce its key interest rate by 25 basis points, marking the third consecutive cut and bringing the total decrease to one full percentage point since September. This decision is significant for consumers who have felt the burden of high borrowing costs resulting from 11 consecutive rate hikes between March 2022 and July 2023. However, it is anticipated that the impact of these lower rates on household finances may not be immediate.
Greg McBride, the chief financial analyst at Bankrate.com, noted the contrasting dynamics of interest rates, stating, “Interest rates took the elevator going up in 2022 and 2023 but are taking the stairs coming down.”
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Despite a generally optimistic outlook for many Americans as the new year approaches, a recent survey from WalletHub reveals that nearly 90% still consider inflation a concern, with 44% expressing dissatisfaction with the Federal Reserve’s management of the situation. John Kiernan, WalletHub’s managing editor, emphasized that discussions around potential tariffs add to borrower anxiety.
For now, high interest rates continue to influence consumer borrowing across various sectors, including auto loans and credit cards.
The recent cut of 0.25 percentage points brings the Fed’s overnight borrowing rate to a range of 4.25% to 4.50%. While this does not directly affect consumer rates, it plays a pivotal role in shaping the borrowing and savings rates that individuals encounter regularly.
With this context in mind, we evaluate how the Fed’s rate reduction might shape financial dynamics for consumers in the coming year.
Credit cards
Most credit cards operate with variable interest rates, creating a direct link to the Federal Reserve’s benchmark. Over the past couple of years, the average credit card interest rate surged from 16.34% in March 2022 to over 20% currently, nearing record highs.
Since the Fed initiated rate cuts, the average credit card interest rate has slightly decreased but remains elevated.
“While another rate cut is appreciated as the year concludes, its true benefit for those in debt is limited,” stated Matt Schulz, a credit analyst from LendingTree. He indicated that a quarter-point reduction might reduce monthly payments minimally, underscoring the importance for cardholders to proactively manage their high-interest debts in 2025 through consolidation or negotiation for lower rates.
Soaring grocery prices and other expenses continue to burden consumers, necessitating those with debt to explore options like balance transfer cards or personal loans to avoid the pitfalls of compounding interest.
Auto loans
Auto loan rates remain exceptionally high, with average rates for used cars standing at 13.76% and new vehicles at 9.01%, as indicated by Cox Automotive. Given that most of these loans are fixed, borrowers won’t benefit directly from the Fed’s cuts.
Experts argue that consumers seeking auto financing should shop around for better rates, potentially saving over $5,000, according to a 2023 LendingTree report.
Mortgage rates
The fixed nature of 15- and 30-year mortgage rates generally means they do not directly correlate with the Fed’s interest rate cuts, as they are more closely tied to Treasury yields. Recently, the average rate for a 30-year fixed mortgage has risen to 6.75% from 6.67%, as reported by the Mortgage Bankers Association.
Bankrate’s McBride noted that despite the Federal Reserve’s moves, mortgage rates have climbed since the start of rate cuts in September, hinting at lowered expectations for future cuts and rising long-term bond yields.
Those with existing fixed-rate mortgages are shielded from immediate impacts unless they consider refinancing or moving. In contrast, home buyers can still benefit from marginal savings on mortgage payments, which, while seemingly small, can add up to significant totals over time.
Student loans
With federal student loan rates being fixed, borrowers typically won’t see much change benefiting from rate cuts. Private loans, often structured with variable rates linked to Treasury rates, could see some decrease. Higher education expert Mark Kantrowitz suggested that while a quarter-point cut may reduce monthly payments marginally, borrowers might find refinancing opportunities with better rates.
However, switching from federal to private loans could eliminate important protections offered by federal programs, posing risks that borrowers should carefully consider.
Savings rates
The Federal Reserve does not directly dictate deposit rates, but changes in the federal funds target often lead to corresponding movements within the savings landscape. As a result of earlier hikes, online savings accounts are yielding competitive rates, some nearing 5% — a sharp increase from approximately 1% in 2022.
McBride from Bankrate emphasized that slower anticipated moves from the Fed could provide better scenarios for savers, while still offering competitive yields on various savings vehicles.
For instance, while average one-year certificates of deposit (CDs) yield around 1.74%, top performers are offering rates above 4.5%, making them an appealing option for savers in today’s economic climate.
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