Fed cuts interest rates after election. What does that mean for you?

The Federal Reserve announced Thursday that it will cut its benchmark interest rate by a quarter point, or 25 basis points, less than two days after President-elect Donald Trump won the 2024 election.

Economic uncertainty was the mood ahead of Election Day after a long period of high inflation left many Americans struggling to afford the cost of living.

But recent economic data suggests inflation is falling toward the Fed's 2% target, paving the way for the central bank to cut interest rates this fall. Thursday's reduction is the second, after a half-point reduction on September 18.

The federal funds rate sets overnight borrowing costs for banks but also affects consumers' borrowing costs.

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Since the last central bank meeting, the personal consumption expenditures price index — the Fed's preferred measure of inflation — showed a rise of just 2.1% year over year.

Although the central bank operates independently of the White House, Trump has been pushing for the Fed to cut interest rates.

For consumers struggling under the weight of higher borrowing costs after a series of 11% interest rate increases between March 2022 and July 2023, the move comes as good news — although it may be some time before lower interest rates noticeably impact budgets. Captivity.

“The Fed raised interest rates from the equivalent of the ground floor to the 53rd floor of a skyscraper, and now they are on the 47th floor and another rate cut will take us to the 45th floor — the view is not much different,” he said. Greg McBride, chief financial analyst at Bankrate.com.

From credit cards and mortgage rates to car loans and savings accounts, here's a look at how the federal funds rate cut will start to impact your finances in the coming months.

Since most credit cards have a variable interest rate, there is a direct connection to the Federal Reserve Bank's standard. Due to a cycle of central bank rate hikes, the average credit card rate has risen from 16.34% in March 2022 to more than 20% today – near an all-time high.

Annual percentage rates did start to fall with the Fed's first rate cut, but not by much.

“These are still very high interest rates,” said Matt Schultz, credit analyst at LendingTree. “While they will certainly continue to decline in the coming months, no one should expect a significant drop in credit card bills any time soon.”

Instead of waiting for minor APR adjustments in the coming months, the best move for those with credit card debt is to look for a better rate, ask the card issuer for a lower rate on your current card or take out a 0% balance transfer offer, he said. .

“Cutting interest rates again doesn’t change the fact that the best thing people can do to lower interest rates is to take matters into their own hands,” he said.

During his campaign, Trump proposed capping credit card interest rates at 10%, but that kind of measure would have to pass Congress and overcome challenges from the banking industry.

Although auto loans are stable, rising car prices and high borrowing costs are becoming “increasingly difficult to manage,” according to Jessica Caldwell, head of insights at Edmunds.

“Amid these economic pressures, it is clear that President Trump’s promises of financial relief have resonated with voters across the country,” she said.

The average interest rate on a five-year new car loan is now about 7%, up from 4% when the Fed started raising interest rates, according to Edmunds. However, interest rate cuts by the Fed will mitigate some of the rising cost of financing a car — and likely bring interest rates below 7% — supported in part by competition among lenders and more stimulus in the market.

“As Americans seek relief from the continuing pressure on their wallets, even a modest cut in federal interest rates will be seen as a positive step in the right direction,” Caldwell said.

Trump has supported making interest paid on auto loans fully tax deductible, which would also have to pass through Congress.

Housing affordability has been a major issue due in part to the sharp rise in mortgage rates since the pandemic.

Trump said he would lower mortgage interest rates — even though 15- and 30-year mortgage rates are fixed, and linked them to Treasury yields and the economy. Trump's victory even caused the 10-year US Treasury yield to rise, which sent mortgage interest rates higher.

However, cuts in the Fed's target interest rate could provide some downside pressure.

“Continued rate cuts could begin to bring down mortgage interest rates, which have remained stubbornly high,” said Michel Ranieri, vice president of U.S. research and consulting at TransUnion. As of the week ending November 1, the average rate for a 30-year fixed-rate mortgage was 6.81%, according to the Mortgage Bankers Association.

Mortgage rates are unlikely to fall significantly, given the current climate, said Jacob Channel, chief economist at LendingTree.

“As long as investors remain concerned about what the future may hold, Treasury yields, and therefore mortgage interest rates, will have a difficult time falling and staying low,” the channel said.

Student loan borrowers will receive less relief from interest rate cuts. Federal student loan rates are fixed, so most borrowers will not be affected immediately. With Trump's victory, efforts to forgive student debt are now likely off the table.

However, if you have a private loan, these loans may be fixed or have a variable rate tied to a Treasury bill or other rates. As the Fed lowers interest rates, interest rates on private student loans will fall over a period of one or three months, depending on the benchmark, according to higher education expert Mark Kantrowitz.

However, a quarter-point reduction would only reduce monthly payments on variable-rate loans by about $1 to $1.25 per month for every $10,000 of debt, Kantrowitz said.

Eventually, borrowers with variable-rate private student loans may be able to refinance into a less expensive fixed-rate loan, he said. But refinancing a federal loan into a private student loan would give up the safety nets that come with federal loans, such as deferrals, forbearances, income-based repayment, and loan forgiveness and discharge options.

Additionally, extending the loan term means you'll end up paying more interest on the balance.

While the central bank has no direct influence on deposit interest rates, returns tend to be tied to changes in the target federal funds rate.

As a result of the Fed's rate hikes, interest rates on higher-yield online savings accounts have made big moves and are still paying more than 5% — most savers have been able to profit in nearly two decades — up from about 1%. In 2022, according to Bankrate.

“Yes, interest yields on savings accounts, money markets and certificates of deposit will decline, but the most competitive yields will still easily exceed inflation,” McBride said.

The average rate for one-year CDs is now 1.76%, but rates for higher-yield CDs pay more than 4.5%, according to Bankrate, which is almost as good as a high-yield savings account.

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