After years of rising interest rates, falling rates might soon be on the way. The Federal Reserve is widely expected to begin reducing its target range for the federal funds rate sometime soon, possibly as early as September.
Once the Fed begins to cut rates, it should have ripple effects throughout the economy — and on your wallet.
For some Americans, falling rates will be a negative. (More on that later.) But many other things will get cheaper for consumers.
Here are some ways life might become more affordable once the Fed starts cutting rates — plus the bad news about rate cuts.
Credit card borrowing
When the Fed raises the federal funds rate, credit card interest rates climb — and borrowers with big balances quickly find themselves drowning in a sea of red.
So, you can think of the coming rate cuts as a series of life preservers. As the federal funds rate falls, credit card borrowing costs should drop in tandem, bringing some relief to those who carry a balance month to month.
Of course, you would be much better off eliminating that debt altogether. For more on how to do so, check out “10 Steps to Get Out of Debt Now and Stay Out of Debt Forever.”
Home loans
Today’s mortgage rates are much higher than they were a few short years ago. That has left many would-be buyers unable to afford a home.
A falling federal funds rate does not directly impact fixed mortgage rates. However, the two types of rates are not completely unrelated.
As we have explained:
“There is a widespread myth that when the federal funds rate climbs, rates on fixed mortgages follow right behind it.
That isn’t exactly so. There is no direct connection between the federal funds rate and fixed mortgage rates. However, the two do tend to move in the same general direction.”
The federal funds rate tends to have a more direct impact on the direction of adjustable-rate mortgages (ARMs). As the federal funds rate falls, you can expect that your ARM rate might also decline the next time it resets.
So, a climate of lower interest rates overall should also be good news for those who want to buy a home and for many who already have an adjustable-rate mortgage.
Mortgage Refinancing
Mortgage refinancing also should look more attractive in a falling-interest-rate environment.
It is unlikely that rates will fall low enough to benefit those who currently enjoy a mortgage in the 2% to 3% range — although the future is never clear, and anything is possible.
But those who took out mortgages in 2023 when rates were close to 8% might find a refinance looking more attractive in the near future.
Car loans
Like just about everything else in these inflationary times, cars have grown more expensive. Falling car loan rates would go a long way toward restoring affordability for millions of buyers.
As the federal funds rate falls, car loan costs should follow suit. As you wait for rates to become more attractive, try to save for a larger down payment. The more money you put down, the less you will pay in interest costs on a car loan.
Home equity borrowing
The rate on a home equity line of credit is typically variable. That means that as the federal funds rate falls, home equity borrowing costs also should decline.
It’s a different story for home equity loans, however. These typically have fixed rates, which means a falling federal funds rate should have no impact on those who already have agreed to loan terms.
Business loans
If you are a budding entrepreneur, your costs could become a little lower once the Fed begins to cut rates.
The U.S. Small Business Administration’s 7(a) loan program — the SBA’s most widespread loan program — offers variable-rate loans. That means these rates can climb and fall with the federal funds rate.
The bad news
Falling rates will be a boon for millions of Americans. But other folks may be less thrilled about lower interest rates.
For example, rates on savings accounts and certificates of deposit will likely begin to drift lower once rate cuts begin. That means if you have gotten used to savings rates of 5% — or higher — you might have to settle for a deal that is not as sweet.
Overall, those who are on fixed incomes and who carry little to no debt are likely to shed a tear or two as interest rates fall, even if falling rates may benefit the economy as a whole.
