Federal Reserve interest rate cut: what to expect
The Federal Reserve is expected to lower borrowing costs again on Wednesday.
Another quarter-point reduction, on the heels of September’s cut, would bring the federal funds rate to a range between 3.75%-4.00%.
The federal funds rate, which is set by the Federal Open Market Committee, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves do have a trickle-down effect on many types of consumer loans.
The FOMC has also set expectations for another reduction in December, but after that, the path is unclear. President Donald Trump — who has said a pick to replace current Federal Reserve Chair Jerome Powell could come by the end of the year — has repeatedly weighed in on Fed policy, arguing that rates should be sharply lower.
It’s not a given that rates will continue to fall, and even if they do, not all consumer products are affected equally.
‘The Fed is not cutting every single interest rate’
When the Fed hiked rates in 2022 and 2023, the interest rates on most consumer loans quickly followed suit. Even though this would be the second rate cut in a row, many of those consumer rates are likely to stay higher, for now.
“The Fed is not cutting every single interest rate that exists in the world,” said Mike Pugliese, senior economist at Wells Fargo Economics.
Depending on their duration, some borrowing rates are more sensitive to Fed changes than others, he said: “At one end of the spectrum, you have shorter floating rates, and on the other end, you have a 30-year fixed rate mortgage.”
Those shorter-term rates are more closely pegged to the prime rate, which is the rate that banks extend to their most creditworthy customers — typically 3 percentage points higher than the federal funds rate. Longer-term rates are also influenced by inflation and other economic factors.
Credit cards won’t ‘go from awful to amazing overnight’
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According to Bankrate, nearly half of American households have credit card debt and pay more than 20% in interest, on average, on their revolving balances — making credit cards one of the most expensive ways to borrow money.
Since most credit cards have a short-term, variable rate, there’s a direct connection to the Fed’s benchmark.
When the Fed lowers rates, the prime rate comes down, too, and the interest rate on your credit card debt is likely to adjust within a billing cycle or two. But even then, credit card APRs will only ease off extremely high levels. And generally, card issuers have kept their rates somewhat elevated to mitigate their exposure to riskier borrowers.
“Even if the Fed steps on the gas in the coming months when it comes to rate cuts, credit card rates aren’t going to go from awful to amazing overnight,” said Matt Schulz, LendingTree’s chief credit analyst.
For example, if you have $7,000 in credit card debt on a card with a 24.19% interest rate…
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