What to expect ahead of Federal Reserve’s first rate cut in years

By Finance News On Sep 15, 2024

Powers: The Fed is going to gradually cut rates, guiding the economy into a soft landing

Recent signs of cooling inflation are paving the way for the Federal Reserve to cut rates when it meets next week, which is welcome news for Americans struggling to keep up with the elevated cost of living and sky-high interest charges.

“Consumers should feel good about [an interest rate reduction] but it’s not going to deliver sizable immediate relief,” said Brett House, economics professor at Columbia Business School.

Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels in more than 40 years. The central bank responded with a series of interest rate hikes that took its benchmark rate to the highest level in decades.

The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.

“The cumulative progress on inflation — evidenced by the CPI now at 2.5% after having peaked at 9% in mid-2022 — has given the Federal Reserve the green light to begin cutting interest rates at next week’s meeting,” said Greg McBride, chief financial analyst at Bankrate.com, referring to the consumer price index, a broad measure of goods and services costs across the U.S. economy.

However, the impact from the first rate cut, expected to be a quarter percentage point, “is very minimal,” McBride said.

“What borrowers can be optimistic about is that we will see a series of rate cuts that cumulatively will have a meaningful impact on borrowing costs, but it will take time,” he said. “One rate cut is not going to be a panacea.”

Markets are pricing in a 100% probability that the Fed will start lowering rates when it meets Sept. 17-18, with the potential for more aggressive moves later in the year, according to the CME Group’s FedWatch measure.

That could bring the Fed’s benchmark federal funds rate from its current range, 5.25% to 5.50%, to below 4% by the end of 2025, according to some experts.

The federal funds rate, which the U.S. central bank sets, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

Rates for everything from credit cards to car loans to mortgages will be affected once the Fed starts trimming its benchmark. Here’s a breakdown of what to expect:

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.

For those paying 20% interest — or more — on a revolving balance, annual percentage rates will start to come down when the Fed cuts rates. But even then they will only ease off extremely high levels,…