The Rate Cut and YOU!
At 2:00 pm ET on Wednesday, the 18th of September, the Fed cut interest rates by 50 basis points. This will drop the Prime Rate to 4.75-5.0%.
Based on what Fed Chief Jerome Powell said at his press conference, by the end of calendar 2024, rates will likely decrease a bit further, and more in 2025.
This matters to you if you owe money, invest money and/or save money. First, the simplest outcome: NO, your credit card interest rate will not decrease by any meaningful amount. While the spread between the Prime Rate, and average credit card interest rates has grown over time, recent legislation has decreased other sources of income for the credit card issuers, and thus, issuers won’t decrease rates fairly. Bottom line: pay off those credit cards!
Face it, the banks and other credit card issuers will wring every dime they can from you. And your personal interest rate is based on your credit score and other data, so your mileage might vary.
Car loan rates MIGHT decrease. This will depend on your credit score and related factors, and whether you are buying a new or used car, the latter having higher rates. If you are in the market for a new car, there are a lot of dealer incentives, especially on EVs, which aren’t selling well. I’ve seen deals on TV with below-market rates on certain vehicles.
Student loans? If you have a private loan, there may be some movement. If you have a government-backed loan, those rates are steady for the term of the loan based on when you took it out. Government student loan rates reset every July 1st, so there will be no change now for originating loans.
Mortgage rates will fall, but that doesn’t mean the cost of houses will decrease. First, a rate cut was expected, so mortgage rates have already fallen a little. There will be slow drops from now into next year, especially with the likely further cuts.
However, there’s a high probability that even if this cut helps increase supply, because Boomers are now more willing to downsize, and other people are ready to move to larger houses, it will drive UP the cost of housing because there will be a return to bidding wars. (I hope I’m wrong.) The housing cost problem is a combination of a lack of supply, corporate ownership (moving houses-to-buy to houses-to-rent), Airbnb, VRBO, and the fact that building has not kept up with demand as we’ve looked at before.
If you have a savings account at a standard bricks and mortar bank or credit union, those rates can’t really fall, since most are in the neighborhood of 0.1% to 0.4%. The online bank savings rate will fall in line with the Fed’s new rate, but it will still beat inflation, as will Money Markets.
If you own stocks, the biggest beneficiaries will likely be dividend stocks, telecoms, consumer staples, utilities and real estate investment trusts. Other businesses that have stock may not fare as well, as they are sensitive less to interest rates and more to job-related considerations. Expect market volatility.
Remember above all else that 2/3 of the US economy is driven by consumers. Like us. The more we buy, the better for corporate bottom lines. That drives up stock prices, if you own stocks!
You probably know everything I just wrote. But what you may not know is that the interest rate drop is great for a green economy. Yes, really. There is money in the Inflation Reduction Act for homeowners that helps pay for energy-efficient projects, like installing solar panels. Sadly, a lot of solar companies went out of business this year.
Back when interest rates were zero, the solar companies could afford the large upfront costs for the panels, which they then sold over time to consumers, or absorbing the costs and leasing the panels to consumers. High interest rates harmed that model. The lowered interest rates may well bring companies back into existence.
From a political perspective, decreased rates are good for the administration. You can expect MAGA world to call foul and say that Jerome Powell only reduced rates because we’re coming up on an election. If you hear that, remind whoever said it that Powell was appointed by the Convicted Felon himself. They’ll also claim that the 50 basis point drop was due to a terrible economy. Also untrue, as Powell and the rest of the Fed pulled off the near-impossible feat of a soft landing.
So there you have it.
We are the fortunate few... we bought when the rates were rock bottom. We'll never refinance. We got a ridiculously low rate for our new car last year (<5% they wanted to move cars) and we have a perfect FICO score. It's taken years to get here, but never being late or missing a payment has been worth the effort.
Two days ago I received a solicitation from Synchrony Bank for a Lowe's Card - AT 31.99% INTEREST!
Normally, these things go into the shredder, but I was feeling feisty. I circled the ridiculous interest rate in red and wrote on the sheet "Are you out of your fucking mind?" and mailed it back in their postage-paid envelope. Hell - Loan Sharks don't charge that much!
Not to mention the last thing I need is a big box home improvement credit card - especially at usury rates! As with student loans, credit cards are ridiculously easy to get - and ridiculously difficult to pay off. I speak from experience.
And... depending on how banks play the mortgage game, I can see home prices rising... cheaper money means more borrowing power...
I'm just glad I'm out of the game. My nieces and nephews, though... ::sigh::
As with many sectors of the economy, prices rise when a related cost increases or there's perceived risk of it increasing. Many companies are slow to decrease. They prolong the higher prices as long as they can get away with it; profits are higher when costs recede and sales/inflows remain high. There are similarities between Banks/Credit card companies behaving as they do as how gas prices at the pump and related Big Oil companies behave. Consumers have some discretion, but will generally still continue purchasing.