When the Fed cuts interest rates, it affects everything from your savings account to your auto loans

Business Insider Finance 0 month ago

The Federal Reserve and its policymaking branch, called the Federal Open Market Committee, are in charge of controlling the growth and size of the economy, and they do it through interest rates.

Interest rates do a lot to encourage spending and saving — when rates go down, consumers are more likely to spend rather than save, and inject more money into the economy. So, when they meet, they sometimes decide to change the federal funds rate, or the interest rate that banks charge each other for loans. This interest rate influences all the rest — when it's cut, borrowing becomes cheaper and saving becomes less lucrative to encourage spending.

After years of steadily raising rates to slow the rebound from the Great Recession, the Federal Reserve voted to lower the federal funds rate again to between 1.75% to 2% during their September meeting on Wednesday. This will be the second cut this year, following the first in July.

Greg McBride, chief financial officer at Bankrate, told Business Insider in July that the cut was likely to spur growth.

"The Fed is trying to put some oil in the gears of the economy," McBride said. "The economy's in good shape now, but there are concerns about slower economic growth overseas as well as trade due to tariffs that could act as an anchor."

But a rate cut doesn't mean that there will be huge changes overnight. All they're doing, McBride said, is "walking back to the last increase they made in December."

Rate cuts benefit borrowers, not so much savers

Borrowers and savers will each see the changes differently.

"When interest rates go down, consumers will typically see a similar decrease in credit card rates, home equity lines of credit, variable rate student loans, and small business loans," McBride said. "For savers, it will translate to lower returns on savings accounts and CDs."

But, you may not notice the change exactly reflected. "Credit card rates and home equity lines of credit are benchmarked to the prime rate, which moves in concert with the Federal Funds rate. So, when the Fed cuts rates by 0.25%, the prime rate also goes down by 0.25%," McBride said.

"It won't necessarily be a one-for-one correlation," he said. Not everything is so closely tied to the prime rate, especially considering things like auto loans. "Car loan rates may decline, but not necessarily by a quarter of a percentage point," he added.

Those shopping for homes shouldn't be too worried about this. "Mortgage rates move well in advance of the Fed, so mortgage rates are not tied to the short term interest rate that the Fed affects," McBride said.

It's a good time to save, pay off debt, or refinance

There's not much that you can or should do, except the usual: Save for when you need it and spend what you have to.

Just because you may not be seeing quite as high of returns on your savings account or CDs doesn't mean to stop putting money in. "You need savings for unplanned expenses no matter what," McBride said. "In fact, if interest rates are falling, I'd argue that's even more of an incentive to boost your savings. Because if the economy rolls over, you want to make sure that you've got plenty of money saved."

He adds that periods of lower interest rates might be an excellent time to look into paying down high-interest debt or refinancing student loans. "There's an opportunity to shop around and make sure you're getting the best deal," McBride said.

But for those looking to buy a car, get a loan, or take out a home equity line of credit, lower rates make for an excellent time to do it.


Source link
Read also:
Business Insider › Finance › 0 month ago
The Federal Reserve's lowering of the federal funds rate will lead to an interest rate decrease for borrowers. Borrowers may see interest rates decrease on credit cards, variable rate student loans, auto loans, small business loans, and home equity...
Business Insider › Finance › 5 days ago
A no-fee high-yield savings account can be a great tool to organize your money. Most high-yield savings accounts offer 2% interest or more (although rates are subject to change), while savings accounts at traditional banks can offer as little as 0.01%...
Business Insider › Finance › 2 weeks ago
When Anna Baluch got married, she and her husband decided to combine their savings in a high-yield savings account with the online bank Ally, which paid 2.2% interest at the time (as of October 2019, this account pays 1.9% interest). They both had...
USA Today › Finance › 0 month ago
How will the Fed's anticipated rate cut Wednesday affect credit card, home equity line, savings rates. It's the Fed second cut in less than 2 months
CNBC › 6 days ago
Ally, one of the most popular online banks, informed account holders it's dropping the interest rate on its high-yield savings from 1.9% to 1.8% today, following previous cuts earlier in the year from a high of 2.2% APY. Here are some alternatives.
Business Insider › Finance › 1 month ago
Financial planners and savers alike are obsessed with high-yield savings accounts. High-yield savings accounts offer 2% interest or more (although rates are subject to change), while savings accounts at traditional banks can offer as little as 0.01%...
USA Today › Finance › 1 month ago
Is the Fed bonkers? Does it really believe cutting interest rates more boosts borrowing? Are you really hot to lend your savings long-term at 1%?
Business Insider › Finance › 1 week ago
Credit Karma is launching a high-yield savings account offering 2.03% APY. This is the first financial product it has offered, but CEO Ken Lin said at an event that "we don't want to be a neobank." Savings account yields in general have been falling...
Business Insider › Finance › 3 weeks ago
Author Sarah Li Cain needed a place to keep her savings for her first home that would earn interest but not put her money at risk. She settled on a high-yield savings account with Ally, which had no monthly fees or minimum-balance requirement, and it...
Business Insider › Finance › 3 weeks ago
After years of procrastinating on moving my savings into another account to earn interest, I finally opened a Wealthfront high-yield cash account. Wealthfront cash accounts come with a 2.07% APY (as of September 20), have a $1 minimum deposit, and are...
Sign In

Sign in to follow sources and tags you love, and get personalized stories.

Continue with Google
OR