The Fed seems ready to cut interest rates. What does it mean for consumers and their debt?
The Fed is expected to cut interest rates this week, a decision likely to be the start of a gradual decline in how much consumers pay for cars, houses and everything they buy on credit.
Just don’t expect sudden changes.
Lenders and markets have anticipated a rate cut for weeks, so “this has been priced into the market,” said Jerry Nickelsburg, faculty director of the UCLA Anderson economic forecast.
As a result, “We shouldn’t expect this upcoming Fed rate cut or lower mortgage rates to totally reshape California’s housing market, or its overall economy,” said Jacob Channel, senior economist at LendingTree, which tracks interest rates.
The Federal Reserve is expected to cut its target interest rate when it meets Tuesday and Wednesday. A cut would reverse a trend of higher rates that began in early 2022.
The cut, likely to be announced Wednesday afternoon, is seen as between one-fourth and one-half of 1 percentage point.
The Fed began increasing its target rate as the pace of inflation began to spike in early 2022. Its aim was to slow the price increases, which hit a 40 year annual high of 9.1% that summer.
Higher rates usually help slow price increases, since demand cools and sellers of goods and services are less inclined to raise prices. The strategy has largely worked, as the rate of inflation for the 12 months ending in August was 2.5%, according to the federal Bureau of Labor Statistics.
The Fed’s current target rate is between 5.25% and 5.5%. That is the rate banks charge one another for overnight lending. The banks and other lenders then loan funds to consumers at higher rates in order to make a profit.
Is this the first of many interest rate cuts?
Many economists see even further rate cuts in the months ahead, thanks to the slowing pace of inflation and a desire to boost an economy that appears to be slowing down..
Declining oil prices and slower wage increases make the future inflation outlook “cautiously optimistic,” said Sung Won Sohn, president of SS Economics, a Los Angeles-based economic consulting firm.
As a result, he said, the Fed is “likely to consider further policy adjustments to maintain stability in the face of evolving economic conditions.”
Will this be a good time to buy a home?
There’s no easy answer.
“Borrowers are likely going to meet rate cuts with open arms, but borrowing isn’t about to become so inexpensive that people feel obligated to totally change their financial strategies,” said Channel.
“Don’t expect getting a mortgage and buying a house to suddenly become dramatically easier in the immediate future,” he said.
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Rates for a 30-year mortgage have been dropping, from a high of 7.79% 11 months ago to 6.2% last week, according to Freddie Mac, which tracks rates.
More good news: the median price of a home statewide was down in July, the latest data available. That was the second straight month of decline after hitting a record high in May, said the California Association of Realtors.
The July median price was down 1.6% from June to $886,560. That figure, though, was still 6.5% higher than a year earlier, when the median was $832,530.
Sales of existing single family detached homes in California were up in July, and there was optimism about what’s ahead.
“This improvement in lower borrowing costs could motivate homebuyers on the sideline to re-enter the market, especially since home prices began to soften at the tail end of the homebuying season,” said Jordan Levine, the association’s chief economist, in a statement.
The association said in a press release it expects home prices to “soften further in coming months but should continue to register moderate year-over-year growth for the rest of the year.”
Mortgage rates generally depend on longer-term trends. Freddie Mac said this week that rates have dropped because of “incoming economic data that is more sedate.”
Will my credit card interest rate drop?
“This one rate cut isn’t really going to make much of a difference for most people,” said Matt Schulz, credit analyst at LendingTree.
Regardless of what the Fed does, he said, consumers can keep credit interest rates low fairly easily. They can pay their credit card bills on time and pay no interest, or shop for lower rates among the many creditors offering loans.
In September, the average rate on a new credit card offer has been 24.92%, the same as in August.
“These are historically high rates, and while they’ll almost certainly fall from record highs in coming months, no one should expect dramatically reduced credit card bills anytime soon,” said Schulz.
“Barring the Fed unexpectedly stomping on the gas pedal when it comes to lowering rates, credit card APRs (annual percentage rates) are still going to be high for the foreseeable future,” he said.
Will monthly car payments decrease?.
Schulz saw auto loan rates falling, but again said it’s up to consumers to find the best rate.
“It is still crucial to shop around for the best available rates and get pre-approved for a loan before you ever head into the dealership because the rates you’d get from the dealer can be far higher than what you can get elsewhere,” he said.
The average monthly car payment on a new car has reached $735 this year.
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