A customer shops for school supplies as an employee restocks shelves at a Target store in Queens, New York.
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Now, with the central bank setting the stage for its first interest rate cut in years when it meets again in September, consumers may see their borrowing costs start to fall, too — and some already are.
The federal funds rate, set by the U.S. central bank, is the rate at which banks borrow and lend to each other overnight. Although it’s not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.
“The first cut will not make a significant difference to people's pockets, but it will be the start of a series of rate cuts later this year and into next year,” House said.
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.
From credit cards and mortgage rates to auto loans and student debt, here's a look at where your monthly interest expenses stand as we approach the first interest rate cut.
credit cards
Since most credit cards have a variable interest rate, there is a direct link to the benchmark interest rate set by the Federal Reserve. Following the rate hike cycle, the average credit card interest rate has risen from 16.34% in March 2022 to more than 20% today—close to an all-time high.
At the same time, as families struggle to keep up with the rising cost of living, credit card balances are also higher, and more cardholders are carrying debt from month to month or falling behind on payments.
A recent report from the Federal Reserve Bank of Philadelphia showed a record number of credit card delinquencies, according to data going back to 2012. Revolving credit balances also hit a new high even as banks announced tighter credit standards and new card issuances declined.
For those paying 20% interest — or more — on a revolving balance, annual percentage rates will start to fall when the Fed cuts rates. But even then, those rates will only ease from very high levels, and will provide little relief, according to Greg McBride, chief financial analyst at Bankrate.com.
“Prices won't come down fast enough to get you out of a bad situation,” McBride said.
Matt Schultz, senior credit analyst at LendingTree, advised that the best move for those with credit card debt is to take matters into their own hands.
“They can do this by getting a 0% balance transfer credit card, a low-interest personal loan, or by calling the card issuer and asking for a lower interest rate on the card. This works more often than you might think,” he said.
mortgage rates
While 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are also partly influenced by Federal Reserve policy. Home loan rates have already started to fall, largely due to the prospect of a Fed-induced economic slowdown.
According to Bankrate, the average interest rate on a 30-year fixed mortgage is now less than 7%.
“If we continue to get good news on things like inflation,[mortgage rates]could continue to trend downward,” said Jacob Channell, senior economist at LendingTree. “We shouldn’t expect any massive declines in the near future, but we could see rates head back to their 2024 lows in the coming weeks and months.”
“If all goes well, we could end the year with the average rate on a 30-year fixed mortgage closer to 6% instead of 6.5% or 7%.”
That may not seem like much at first glance, but “in the mortgage world,” a 50 basis point drop “is no small thing,” Channell added. A basis point is one-hundredth of a percentage point.
Car Loans
Auto loans are fixed. However, payments are becoming larger because interest rates on new loans are higher, combined with rising car prices, which has reduced the ability to make monthly payments.
According to Bankrate, the average interest rate on a five-year new car loan is now just under 8%.
However, McBride said, “Financing is one of the variables, and frankly one of the smaller variables.” For example, he said, a quarter-point cut in interest rates on a $35,000, five-year loan equates to $4 a month.
Consumers will benefit more from improving their credit scores, which could pave the way for better loan terms, McBride said.
Student Loans
Federal student loan rates are also fixed, so most borrowers aren’t directly affected by Fed moves. But undergraduates with direct federal student loans for the 2023-24 school year are paying 5.50%, up from 4.99% in 2022-23 — and the interest rate on direct federal student loans for the 2024-25 school year is 6.53%, the highest rate in at least a decade.
Private student loans tend to have a variable rate tied to the prime rate, Treasury bonds, or another rate index, which means these borrowers actually pay more interest. However, the amount of the increase varies depending on the benchmark.
Savings rates
While the central bank has no direct influence on deposit rates, yields tend to be correlated with changes in the target federal funds rate.
As a result, the highest-yielding online savings account rates have seen big moves and are now paying up to 5.5% — well above the rate of inflation, a rare win for anyone building a cash cushion, according to Bankrate's McBride.
But those rates will fall once the central bank cuts its benchmark interest rate. “If you’re thinking about issuing a certificate of deposit, this is a good time to lock it in,” McBride said. “These yields aren’t going to improve, so there’s no point in waiting.”
Currently, the highest yield one-year CD pays over 5.3%, which is the same as a high-yield savings account.
