Top line
The Federal Reserve is widely expected to announce its first benchmark interest rate in years on Wednesday. The move will have a significant impact on the finances of all Americans and make borrowing cheaper, but the golden days of high-interest savings may be over.
US Federal Reserve Chairman Jerome Powell is expected to speak on January 1. … (+)
Key data
The results of the Fed’s two-day monetary policy committee meeting will be announced at 2 p.m. EDT, and it is almost certain that the central bank will announce the first rate cut since March 2020.
A reduction would push the key interest rate down from 5.25 to 5.5 percent, where it has remained since last July. This would be the highest rate since January 2001.
There is less agreement on how much the Fed will cut interest rates. There is consensus that the Fed will cut interest rates by 25 or 50 basis points. The market therefore expects interest rates to settle in the range of 4.75 to 5 percent or 5 to 5.25 percent on Wednesday.
The Fed’s change of course follows the continued slowdown in inflation that originally led to the interest rate hike.
What impact do Fed interest rate cuts have?
The Fed officially controls only the federal funds rate, which sets the interest rate on overnight cash reserve transactions between banks. But the central bank’s interest rate decisions affect borrowing costs across the board, because lenders typically set interest rates based on the range set by the Fed, and rate cuts will also have broad implications throughout the economy. Here are some of the most tangible effects of rate cuts on the average American:
Housing
Mortgage loans are probably the most obvious shock to consumers from rate cuts, as they are closely tied to Treasury yields, which in turn are a reflection of the Fed’s monetary policy. Mortgage rates on 30-year fixed loans already hit a 19-month low of 6.2% last week as brokers prepared for the upcoming rate cuts. The downward trend is likely to continue as the Fed prepares for more rate cuts.
Car loans
With lower Fed rates, consumer credit will become cheaper, including auto loans, which are currently at their highest rate since 2001. In 2021, the interest rate on new car loans was below 5% and will now be about 8.7%. The cost of other debts, such as variable-rate private student loans and credit card interest, should also fall.
Job market
Companies also benefit from better lending. Lower interest rates usually lead to more positive hiring policies, as employers’ profits increase due to lower credit costs.
savings
Perhaps the biggest negative impact of the rate cuts on Americans’ finances is that the high-yield savings accounts, certificates of deposit and money market funds that have offered savers attractive returns over the past two years will lose some of their luster. These are closely tied to the federal funds rate, meaning that returns on these accounts will fall quickly as the Fed cuts rates.
How interest rate cuts affect stocks
Rate cuts are typically seen as a boon for stocks as money moves out of lower-yielding Treasuries and money market funds and investors look for more attractive returns. The S&P 500 has gained 86% of the time in the 12 months since the first rate cut in a cycle stretching back to 1929, according to Charles Schwab.
Contra
Although interest rates will soon fall, the U.S. is unlikely to return to the low-interest rate environment that has become the norm. The Fed is forecasting a long-term benchmark interest rate of 2.8%, higher than at any time between March 2008 and September 2022, and a far cry from the near-zero rates seen from December 2008 to December 2015 and from March 2020 to March 2022.
