Financial Moves to Consider Before the Fed Cuts Rates

The US Federal Reserve is likely to start cutting interest rates as early as next month, based on the latest inflation data.

“We think the time is coming,” Federal Reserve Chairman Jerome Powell said at a news conference after the last Federal Open Market Committee meeting in July.

For Americans struggling to keep up with rising interest rates, a potential rate cut in September could bring some welcome relief — especially with the right planning.

“If you’re a consumer, this is a good time to ask yourself: What does my spending look like? Where might my money grow and what options do I have?” said Leslie Tyne, a debt relief attorney at Tyne Law Firm in New York and author of Life and Debt.

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Federal Reserve officials have indicated that they expect to cut the benchmark interest rate once in 2024 and four times in 2025.

That could push the benchmark federal funds rate from its current range of 5.25% to 5.50% to below 4% by the end of next year, according to some experts.

The federal funds rate is the rate at which banks borrow and lend to each other overnight. While it’s not the rate consumers pay, the Fed’s moves still affect the rates they see every day on things like private student loans and credit cards.

Here are five ways to organize your finances for the coming months:

And with interest rates on online savings accounts, money market accounts and certificates of deposit all set to fall, experts say now is a good time to secure some of the highest returns in decades.

Currently, the highest-yielding online savings accounts pay more than 5% — well above the rate of inflation.

Although those rates will fall once the central bank cuts its benchmark interest rate, a typical saver with about $8,000 in a checking or savings account could earn an extra $200 a year by moving that money into a high-yield account that earns 2.5% or more, according to a survey by Santander in June. Santander found that most Americans keep their savings in traditional accounts, which FDIC data show currently pay an average of 0.45%.

“Now is the time to hold onto the most competitive CD yields at a level well above the inflation target,” said Greg McBride, chief financial analyst at Bankrate.com. “There is no point in waiting for better returns later.”

Currently, the highest-yield one-year CD pays more than 5.3%, according to Bankrate, which is the same as a high-yield savings account.

As interest rates fall, the prime rate also falls, and interest rates on variable-rate debt — especially credit cards — are likely to follow, reducing your monthly payments. But even then, annual interest rates will only fall to very high levels.

For example, the average interest rate on a new credit card today is about 25%, according to LendingTree data. At that rate, if you pay $250 a month on a card with a $5,000 balance, it will cost you more than $1,500 in interest and take 27 months to pay off.

If the central bank cuts interest rates by a quarter of a percentage point, you’ll save $21 and be able to pay off the balance a month early. “It’s nothing, but it’s a lot less than you’d save with a 0% balance transfer credit card,” said Matt Schultz, senior credit analyst at LendingTree.

Instead of waiting for a small adjustment in the coming months, borrowers can now switch to a zero-interest balance transfer credit card or consolidate high-interest credit cards and pay them off with a personal loan, Tain said.

If you're planning a major purchase, such as a home or car, it may be better to wait, since lower interest rates may reduce the cost of financing in the future.

“Timing your purchase to coincide with low interest rates can save money over the life of the loan,” said Tain.

Although mortgage rates are fixed and tied to Treasury yields and the economy, they have already started to decline from their recent highs, largely due to the prospect of a Fed-induced economic slowdown. The average rate on a 30-year fixed mortgage is now about 6.5%, according to Freddie Mac.

Compared to a high of 7.22% last May, today’s lower interest rate on a $350,000 loan would save $171 a month, or $2,052 a year and $61,560 over the life of the loan, according to calculations by Jacob Channell, senior economist at LendingTree.

However, McBride said lower mortgage rates could also boost demand for homes, which would push prices higher. “If lower mortgage rates lead to higher prices, that would offset the affordability benefit for potential buyers,” he said.

Exactly what will happen in the housing market is “still unclear” depending on how low mortgage rates are in the second half of the year and the level of supply, Channel said.

“Timing the market is practically impossible,” he said.

For those with existing debt, there may be more options to refinance once rates drop.

For example, private student loans tend to have a variable rate tied to the prime rate, Treasury bonds, or another rate index, which means that once the Fed starts cutting interest rates, interest rates on private student loans will also fall.

Ultimately, borrowers with private student loans with variable interest rates may be able to refinance them into a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz.

He said that fixed rates on private refinancing currently range between 5% and 11%.

However, refinancing a federal loan into a private student loan would deprive you of the safety nets that come with federal loans, he added, “such as deferrals, forbearances, income-based repayment, and loan forgiveness and discharge options.” Plus, extending the term of the loan means you’ll end up paying more interest on the balance.

David Peters, founder of Peters Career Education in Richmond, Va., cautions against extending the terms of potential loans. “Consider keeping your principal after refinancing to reduce the principal as much as possible without changing your cash flow,” he said.

Similar considerations may also apply to home and auto loan refinancing opportunities, depending in part on your current interest rate.

Those with better credit may actually qualify for a lower interest rate.

For example, when it comes to car loans, there’s no doubt that inflation has had a huge impact on financing costs – and car prices. According to Bank Reit, the average interest rate on a new five-year car loan is now around 8%.

But in this case, “financing is one of the variables, and frankly one of the smaller variables,” McBride said. For example, a quarter-point cut in interest rates on a $35,000, five-year loan equates to $4 a month, he calculates.

Here, and in many other situations, consumers will benefit more from paying down revolving debt and improving their credit scores, which could pave the way for better loan terms, McBride said.