How December’s Fed rate cut affects borrowing costs

The Federal Reserve cut its benchmark rate by a quarter point at its last meeting of the year.

December’s move marks the third time in a row the central bank has lowered interest rates, shaving three-quarters of a point off the federal funds rate since September to a range of 3.5% to 3.75%.

The cuts could have an effect on many of the borrowing and savings rates consumers see every day.

Although the federal funds rate, set by the Federal Open Market Committee, is the interest rate at which banks borrow and lend to one another overnight and not the rate that consumers pay, the Fed’s actions still influence many types of consumer products.

Many shorter-term consumer rates are closely pegged to the prime rate, which is typically 3 percentage points higher than the federal funds rate. Longer-term rates are also influenced by inflation and other economic factors.

From credit cards and car loans to mortgage rates, student loans and savings accounts, here’s a look at the ways the Fed rate cut could affect your finances.

Most Americans have at least one credit card, and the majority of cardholders carry a balance from month to month, which means they are likely paying around 20% a year in interest on those short-term loans.

But since credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. With a rate cut, the prime rate comes down and the interest rate on your credit card debt should follow within a billing cycle or two.

Although a quarter-point change doesn’t mean much when credit card APRs are sky high, the collective effect of consecutive cuts could add up to a noticeable difference, especially compared to last year’s record high rates, according to Matt Schulz, LendingTree’s chief credit analyst.

“The reductions could mean hundreds of dollars in savings for debtors,” he said.

Mortgages are most Americans’ most significant debt burden, but those longer-term loans are less impacted by the Fed. Both 15- and 30-year mortgage rates are more closely tied to Treasury yields and the economy.

As the 10-year Treasury yield continues to climb amid worries about persistent inflation, the average rate for a 30-year, fixed-rate mortgage has edged higher too, and is currently about 6.35%, according to Mortgage News Daily as of Dec. 9.

“Given that mortgages are benchmarked off of 10-year yields, we may well see an increase in mortgage rates following a cut,” as the stock market and investors react, said Brett House, economics professor at Columbia Business School.

But since most people have fixed-rate mortgages, their rate won’t change unless they refinance or sell their home and buy another property. 

Other home loans are more closely tied to the Fed’s moves. Adjustable-rate mortgages, or ARMs, and home…