“How Fed Rate Cuts Could Affect Your Loans and Savings”

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Understanding Interest Rate Reduction Projections

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding your finances. For more information, see our Editorial Policy.

What Are the Interest Rate Reduction Projections?

The Federal Open Market Committee (FOMC) raised the federal funds rate 11 times between March 2022 and July 2023. Since then, the rate has been steady at a range of 5.25% to 5.5%. In December 2023, the committee indicated that they expected to cut the rate three times in 2024, totaling a reduction of 0.75%. Economists expect the first rate cut to occur in May or June.

Further reductions are projected for 2025 and 2026, bringing the rate into the 2% to 2.25% range. However, these are just projections, and actual decisions will depend on how quickly the inflation rate cools to the agency’s target of 2%.

How Fed Rate Reductions Impact Borrowing

Banks use the federal funds rate to determine how much to charge other banks when lending money to meet overnight reserve requirements. This rate directly influences the prime rate, which banks and other lenders use to determine interest rates for various loans, including both installment loans and revolving lines of credit.

Installment Loans

For both fixed- and variable-rate loans, the prime rate helps determine the loan’s starting interest rate. If you plan on taking out a personal loan, auto loan, student loan, or home equity loan, waiting for Fed rate reductions could save you money. With a fixed-rate loan, further rate reductions won’t impact you because your interest rate is fixed for the life of the loan. However, you could potentially refinance the loan at a lower rate.

If you have a loan with a variable interest rate, such as a student loan or adjustable-rate mortgage loan, your interest rate changes regularly based on market conditions. As a result, you’ll likely benefit from each rate reduction with a corresponding decrease in your loan’s interest rate.

Revolving Lines of Credit

If you have a credit card or a home equity line of credit (HELOC), your interest rate is likely variable, which means that both new and existing accounts will likely see interest rates go down along with reductions in the fed rate.

How Fed Rate Reductions Impact Savings

Banks use customer deposits to fund their loans, and because banks and other lenders are earning more from higher loan interest rates, they may also offer higher interest rates on savings products to encourage more deposits. However, each financial institution has a different process for determining its savings rates, so the impact of rate reductions will depend on your bank and the type of account.

Traditional Savings Account

Banks that offer traditional savings accounts typically don’t offer much higher rates when the fed rate is high. As a result, your rate likely won’t go down by much as the FOMC starts cutting rates.

High-Yield Savings Accounts

Banks that offer high-yield savings accounts offer annual percentage yields (APYs) that are much higher than what you can get with a traditional savings account. Because these accounts offer variable rates, you’ll likely start to see your APY decline once the FOMC begins cutting its rate.

Certificates of Deposit

Certificates of deposit (CDs) offer a fixed interest rate instead of a variable one, which means that your APY will remain the same for your chosen term, which can range from one month to several years. Once the FOMC starts cutting its rate, you can expect APYs for new CDs to start declining. However, if you open a CD before the first rate cut, your fixed rate won’t be impacted—though you can likely expect a lower rate when it’s time to renew the account at the end of your term.

How to Minimize the Negative Impact of Fed Rate Reductions

If you have some flexibility with your financial plan, there are steps you can take to enjoy the benefits of fed rate reductions while also minimizing the drawbacks. Options include:

• Hold off on borrowing until interest rates start to decline.
• Look into refinancing existing fixed-rate loans at a lower interest rate.
• Switch to a high-yield savings account to take advantage of higher APYs while you can.
• Consider putting some money in a CD to enjoy a high fixed APY for longer.

The Bottom Line

Keep in mind that, while economic conditions can influence loan and credit card interest rates, your creditworthiness also has a major impact on your ability to get favorable credit terms. Check your credit score and credit report to evaluate your overall credit health, and consider whether you can take steps to improve your credit score before applying for a loan or credit card.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate the complexities of borrowing and saving in a changing economic landscape.

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