Fed Rate Cut: What Consumers Need to Know

The Federal rate cut is likely to have a mixed impact on consumers. While lower borrowing costs can make it easier to finance purchases and reduce debt burdens, lower returns on savings could affect retirement planning and other financial goals. Consumers should carefully consider their individual circumstances and financial plans before making any major decisions in response to the rate cut.

The reason rates were elevated was to slow the economy down, bringing down inflation. That endeavor was successful, and now the Fed wants to give the economy a boost. How do they do this? They make money “cheaper” for the average American to attain by making interest rates less. Say a family gets a loan for a $300,000 home, with 20% down and 5.5% interest, using a mortgage calculator, we know they would have a $1,961 monthly payment. That same scenario but at 7% interest equals $2,157 per month. The 1.5% difference translates into $200 per month that the average consumer could put back into the economy.

Here is how the rate changes can affect consumers:

Lower borrowing costs:

• Mortgages: Interest rates on new mortgages and adjustable-rate mortgages should decrease, making homeownership more affordable or allowing homeowners to refinance into lower-rate loans.
• Auto loans: Interest rates on car loans should also decline, making new and used cars more affordable for those financing their purchase.
• Credit cards: Interest rates on credit card balances should drop, providing some relief to consumers carrying debt.
• Other consumer loans: Personal loans, student loans, and other forms of consumer credit may also become cheaper.
• Business loans: Lower interest rates on business loans could stimulate investment and economic growth.

Lower returns on savings:

• Savings accounts and CDs: Interest rates on savings accounts and certificates of deposit will likely decrease, reducing returns for savers.
• Money market accounts: Yields on money market accounts may also fall, affecting those seeking safe, short-term investments.

Potential impacts on consumer spending and the economy:

• Increased spending: Lower borrowing costs could encourage consumer spending on big-ticket items like homes and cars, potentially stimulating economic growth.
• Increased confidence: The rate cut may signal confidence in the economy, leading to improved consumer sentiment and further spending.
• Stock market impact: Lower interest rates could boost the stock market, potentially benefitting investors.

The actual impact of the rate cut will depend on a variety of factors, including the size of the cut, the overall economic outlook, and the response of financial institutions. It will take some time for the full effects of the rate cut to be felt in the economy, on average, nine to 12 months for rate effects even to take place, so changes will not be immediate. Contact your Fort Pitt Capital Group Financial Advisor to review when and how these changes could affect you and to ensure your investments are set up for success.