USA TODAY International Edition
Fed rate cut won’t mean windfall for you
The Federal Reserve on Wednesday signaled that it may cut interest rates as soon as next month for the first time in more than a decade.
But while rate cuts are like steroids for stock markets, borrowers shouldn’t anticipate a big windfall, because the central bank already has boosted rates sharply the past 31⁄2 years, including four hikes last year, experts say.
“For consumers, all that will do is unwind a fraction of the nine rate hikes enacted since 2015,” says Greg McBride, chief financial analyst at Bankrate.com. “All it does is take you back to where you were 12 months ago.”
About half of Fed policymakers expect to lower the central bank’s key short-term rate by as much as half a percentage point this year. Economists believe the move could happen at a late July meeting if talks next week between President Donald Trump and Chinese President Xi Jingping don’t head off Trump’s threats to slap a 25% tariff on $300 billion in Chinese imports. The new levies would more than double existing ones on China’s shipments and could tip the U.S. into recession, economists say.
Limited help
But let’s put a rate cut in perspective. A quarter-point reduction on a $30,000 home equity line of credit would shave the monthly payment by $6.25, McBride says. Two such cuts would trim the bill by $12.50. By contrast, the nine rate increases since late 2015 have lifted the same payment by $56.
“To households on a tight budget, this is of limited help,” McBride says.
Similarly, a quarter-point cut on a $5,000 credit card balance would lower the minimum payment by just $1 a month, a fraction of the $9 in increases already enacted.
Holden Lewis, a home finance expert at NerdWallet, says any cut would still be money in consumers’ pockets. Those with variable-rate loans, such as home equity lines, “should expect to see smaller monthly payments,” he says. “For those who may be looking to borrow money to fund home renovations, this could be a time to do so cheaply.”
Meanwhile, bank customers who finally have started to benefit from higher savings rates could see some of those gains curtailed going forward. Rates on one-year and longer-term certificates of deposits already have edged down this year in anticipation of lower Fed rates, says Ken Tumin, founder of DepositAccounts.com. That’s likely to accelerate after the Fed on Wednesday more explicitly raised the prospect of rate cuts, he says.
Banks move quickly on such longerterm accounts because they don’t want to get stuck paying higher returns for extended periods when rates are falling, McBride says.
Banks to move quickly
Meanwhile, online banks, which have been paying much higher rates on money market and savings accounts, likely would lower their rates within a month or two of any Fed rate cut as their profit margins narrow. A study Tumin conducted during Fed rate decreases in 2007 found banks initially lower savings rates by about half the size of the Fed’s cut and then catch up to match the central bank’s move within several months.