Will borrowers see lower rates? What the Fed's interest rate cut means for you
Mortgage rates have been largely unchanged.
The Federal Reserve slashed interest rates a quarter of a percentage point this week, delivering its third rate cut since September. The policy brightened hopes among borrowers eager for lower payments.
Relief will vary significantly across different categories of loans, however, some experts said. The Fed’s actions will have little or no impact on long-term borrowing such as home loans or car payments, they said, while short-term loans like credit cards could see a noticeable, albeit incremental rate reduction.
Since last year, the Fed has cut interest rates a total of 1.75 percentage points.
“The cut this week is not terribly significant in and of itself but the cumulated effect has started to stack up,” Ted Rossman, a senior industry analyst at Bankrate, told ABC News.
The reason for a muted response lately for long-term loan rates – such as 30-year mortgages – is that long-term borrowing costs depend on expectations for interest rates years into the future, rather than where they stand today.
On Wednesday morning, just hours before the Fed’s rate decision, futures markets pegged the chances of a quarter-point rate cut at nearly 90%, according to CME FedWatch Tool, a measure of market sentiment. Since the policy announcement aligned with those predictions, the decision had little effect on where the market thinks interest rates are headed.
“Mortgage rates will be largely unchanged because the cut was priced in before the meeting,” Julia Fonseca, a professor at the Gies College of Business at the University of Illinois at Urbana-Champaign, told ABC News.
Mortgage rates closely track the yield on a 10-year Treasury bond, or the amount paid to a bondholder annually. In the aftermath of the Fed’s rate cut on Wednesday, the yield on a 10-year Treasury bond ticked slightly upward, defying the nudge downward by the central bank.
The average interest rate for a 30-year fixed mortgage stands at 6.22%, according to Freddie Mac data released on Thursday. That figure has dropped about half of a percentage point since July, just before the Fed began to signal impending rate cuts. However, 30-year fixed mortgage rates have changed little over recent weeks.
By contrast, rate cuts at the Fed typically deliver relief for credit card holders roughly in line with the central bank’s policy shift, some experts said.
The average credit card interest rate stands at 19.8%, Bankrate data showed. That figure comes in below a record high of 20.79% attained last August, but the current rate shows little change from late 2022.
Credit card interest rates remain elevated in part because the Fed's benchmark rate still stands at a high level. The incremental cuts in recent months have only partially reversed the pandemic-era escalation of rates meant to fight the nation's worst bout of inflation in decades.
“It’s not a huge difference for credit cards,” Rossman said.
The prospect of further loan relief depends on the path forward for Fed policy, some experts said.
Speaking at a press conference in Washington, D.C., on Wednesday, Fed Chair Jerome Powell touted the rate cut as an effort to boost the flagging labor market, but he suggested the central bank may be cautious about further rate reductions.
"We're well positioned to wait and see how the economy evolves," Powell said.
Futures markets expect two quarter-point cuts next year, the CME FedWatch Tool says. That policy outcome could provide modest relief for credit card rates but little change in mortgage rates, unless the Fed makes additional cuts beyond those anticipated by the market, experts said.
“For consumers to see meaningful relief in terms of borrowing rates, the Fed will have to cut by more than the market has heretofore baked in,” Preston Caldwell, chief U.S. economist at Morningstar, told ABC News.
Inflation has picked up in recent months alongside the hiring slowdown, posing a risk of an economic double-whammy known as "stagflation."
The Fed is stuck in a bind, since policymakers must balance a dual mandate to keep inflation under control and maximize employment.
If the Fed holds interest rates steady as a means of protecting against inflation, it risks a deeper slowdown of the labor market. On the other hand, by lowering rates to stimulate hiring, the Fed threatens to boost spending and worsen inflation.
"There's no risk-free path for policy as we navigate this tension between our employment and inflation goals," Powell added.
Uncertainty abounds, Fonseca said, meaning borrowers should make their decisions based on financial circumstances rather than predictions about where interest rates may go next.
“Timing rates is always hard to do,” Fonseca said. “It may be especially hard now.”