FEDS’ DOUBLE CUT
Second chop will have muted impact, experts say
The Federal Reserve has cut its benchmark interest rate again, big news for the U.S. economy but something that will likely have a muted impact on Americans’ personal finances, experts say.
That’s because the reduction doesn’t offset the increases of recent years. And as the key rate creeps closer to zero, financial institutions are less eager to pass borrowing benefits along. Lower rates could also further dampen the perks of savings.
As a reminder, the Fed slashed its benchmark rate — which affects a host of consumer and business loans — to near zero during the recession and kept it there until 2015. Then, as the economy improved, it raised rates several times. Now it has lowered them twice in one year, despite a fairly healthy economy, due to concerns about slowing economic growth and global trade tensions.
The central bank on Wednesday reduced its key rate by a quarterpoint to a range of 1.75% to 2% and said it’s prepared to do what it deems necessary to sustain the U.S. economic expansion.
Here’s how latest move may play out for consumers:
Mortgages: This is a bright spot for consumers. Mortgage rates remain at near historic lows and, while they do not move in lockstep with the Fed, they are influenced by some of the same factors. As of last week, the average rate on a 30-year fixed-rate mortgage was 3.56%. A year ago, it stood at 4.6%, according to mortgage buyer Freddie Mac.
Greg McBride, chief financial analyst at Bankrate.com, said that this full percentage point difference is “the single biggest impact on consumers” in this low rate environment. Low interest rates on mortgages can open the door for homeowners to refinance and save money or for people shopping for a house to secure an attractive rate.
Borrowing: The rate for other forms of borrowing — credit cards, home equity loans or personal loans — won’t see much of a change.
Lenders are also less likely to pass along decreases to consumers than increases.
Credit cards, for example, track the bank prime rate, which is 3% above the federal funds target rate. The prime rate will move down immediately after the Fed decision but many credit card contracts do not automatically adjust rates downwards because they have leeway in their contracts to do so.
The average interest rate on a credit card is 17.61% as of Wednesday, according to Creditcards.com. A year ago it was 16.92%.
Savings: Interest rates on savings accounts were already historically quite low and will likely stay that way.
The FDIC reports that the average rate paid on savings accounts in the U.S. is 0.09%. While some lenders have been competing online to offer high yield savings accounts with rates well above 2%, a few banks have already opted to dial back those offers.