Possible fed rate cuts ahead: 5 things to consider

September 05, 2024 | by Atherton & Associates, LLP

Federal Reserve Chair Jerome Powell has signaled that rate cuts are on the horizon – it’s just a matter of time. As we prepare for this shift, it’s crucial to understand what these cuts might mean for your financial future. 

Currently, the Fed’s benchmark interest rate is at its highest in nearly 25 years, sitting between 5.25% and 5.50%. A potential cut of 0.25% to 0.50% is on the table, and while this might sound like good news, the move could impact everything from your mortgage to your savings. 

This article breaks down what you need to know about these potential changes and how to prepare so you can make informed decisions that align with your financial goals. 

Breaking down the rate cut

When the Fed talks about cutting rates, it means they’re making borrowing money cheaper. This is part of their strategy to keep the economy running smoothly. If you’re paying interest on credit cards or loans, a Fed rate cut means the interest you’re charged could go down, too. However, the impact on your finances might not be immediate or as big as you might hope, especially if the cut is small. 

While the first cut may not make a significant dent in your interest payments, it can signal the start of a trend leading to a more favorable borrowing environment over time. 

Historical trends

Historically, the Fed doesn’t slash rates all at once. Instead, they usually make small cuts over time, sometimes over several months or even years. This gradual approach allows them to carefully manage the economy without causing too much disruption. 

So, when might you start to see lower interest rates on your credit cards or loans? 

It usually doesn’t happen right away. Even if the Fed cuts rates in September, lenders might take a while to adjust their rates. When lenders adjust their rates, the timing varies depending on several factors, including market conditions, the lender’s business model, and competitive pressures. Generally, it can take anywhere from a few weeks to several months for lenders to pass on the benefits of a Fed rate cut to consumers. 

A study by the Federal Reserve Bank of San Francisco found that while some lending rates, such as those for adjustable-rate mortgages, tend to respond relatively quickly to changes in the Fed’s benchmark rate, others, like fixed mortgages, may lag by several months. 

The most recent major rate-cutting cycle occurred during the Great Recession from 2007-2008. The Federal Reserve cut the federal funds rate from a peak of 5.25% in September 2007 down to nearly 0% by December 2008. This series of cuts happened over approximately 15 months. During the early phase of these cuts, mortgage rates began to decline, but the most significant drops occurred about 6 to 12 months after the first rate cut. By mid-2009, mortgage rates had fallen to historic lows. 

Five financial moves to consider

Lock in high-yield savings ASAP

One of the most immediate and actionable steps you can take is to lock in the high interest rates currently available on savings accounts, CDs, and other safe investments. Currently, with the Fed’s benchmark interest rate at the highest level in nearly 25 years, savers have been enjoying some of the best returns in decades. But this window of opportunity may be closing soon, because the yields on savings accounts and CDs usually decrease when the Fed cuts rates. 

Given that CDs lock in a fixed interest rate for a specific term, they can be an excellent way to secure these higher rates before they potentially decline. If you’re worried about locking up all your money in a long-term CD, consider creating a CD ladder. This strategy involves spreading your investment across multiple CDs with different maturity dates. This way, you can benefit from higher rates now while also having some funds available to reinvest later. 

However, make sure your emergency fund is kept in a high-yield savings account. Not only will this help your money grow, but it will also be accessible when you need it. 

Work on your credit score to position yourself for lower rates

With a potential Fed rate cut on the horizon, now is the opportune time to focus on improving your credit score. Even if interest rates drop, a poor credit score could keep you from getting the best rates and terms. 

Start by reviewing your credit report for any errors or inaccuracies that might be dragging your score down. Make it a priority to pay all your bills on time and reduce any high balances, aiming to keep your credit utilization below 30% – ideally even lower. If your credit score is currently low, consider using a secured credit card to help rebuild it over time. These steps can position you to take full advantage of lower rates when they become available. 

Credit cards: take action as rates begin to fall

As the Fed raised rates, many credit card interest rates climbed as well. However, don’t expect your card’s interest rate to drop in line with the Fed’s rate cuts, especially if the reduction is modest – just 0.25%. Credit card companies are often slow to lower rates, if they do so at all. 

That said, falling rates could spark increased competition among credit card issuers. Some may start offering 0% balance transfers, lower rates, or other perks to entice you to switch. This puts the ball in your court: take the initiative to call your current provider and negotiate a better rate, or be prepared to shop around for more favorable terms. 

Plan ahead for major purchases

Major purchases, such as homes or cars, could also become more affordable as lower interest rates reduce the cost of financing. However, timing these purchases to align with rate cuts requires careful planning, as market conditions can be unpredictable, and increased demand might drive prices higher. 

Historically, mortgage rates tend to follow the trend of the Fed’s rate changes, but not always immediately. For instance, after rates were cut in the wake of the 2008 financial crisis, mortgage rates dropped significantly, hitting historic lows by mid-2009. But the process took time and not every rate cut led to an immediate decrease in mortgage rates. 

Auto loan rates can also be influenced by rate cuts, and the effect is often more immediate compared to mortgages. But factors like lender policies, borrower creditworthiness, and vehicle demand also play a role. 

That said, keep in mind that lower interest rates can lead to increased demand for homes and cars as financing becomes more accessible. This increased demand can drive prices higher, potentially offsetting the benefits of lower interest rates. For example, during 2020-2021, low mortgage rates contributed to a surge in housing demand, which pushed home prices to record highs in many areas. 

Refinance with caution

While refinancing can be a smart way to take advantage of lower interest rates, it’s not practical or cost-effective to refinance your mortgage after every rate cut. Instead, it’s important to assess when refinancing will truly benefit you financially, factoring in the costs associated with the process. The total costs of refinancing include closing costs, loan origination fees, and any prepayment penalties. Closing costs for refinancing typically range from 2-5% of the loan amount. 

Consider using a refinancing calculator to determine how much rates would need to fall to offset closing costs and other fees. Generally, if you can reduce your rate by 1% or more, refinancing might be worth considering, but this varies based on your specific situation. 

Personalized guidance for your financial strategy

As you consider the potential impact of a Federal rate cut, it’s essential to remember that every financial decision should be carefully tailored to your unique situation. This article provides an overview of what to keep in mind and how historical trends might guide your choices, but the specifics of your financial strategy might require a more nuanced approach. 

If you’re thinking about making any significant changes to your financial strategy, we strongly recommend seeking professional advice. Our office is here to provide personalized guidance and help you make informed choices. Contact us today to discuss how you can best position yourself to take advantage of upcoming changes and ensure your financial strategy remains strong.