The Best Financial Choices to Make Before a Fed Rate Cut
“With many signs of an economic slowdown, the June consumer price index is certainly the ‘additional positive data’ on inflation that Fed Chairman Jerome Powell has said we need to see before the Fed can begin cutting interest rates,” said Greg McBride, chief financial analyst at Bankrate.com.
With a rate cut now looking more likely, households could finally get some relief from the sky-high borrowing costs that followed the latest round of interest rate hikes, which pushed the Fed’s benchmark rate to its highest level in decades.
More information on personal finance:
High inflation largely not Biden or Trump’s fault, economists say
Why Housing Inflation Remains Stubbornly High
More Americans Are Struggling Despite Falling Inflation
Fed officials have indicated they plan to cut their benchmark rate once in 2024 and four more times in 2025.
The federal funds rate, set by the U.S. central bank, is the interest rate at which banks borrow and lend money to each other on a day-to-day basis. While it’s not the rate consumers pay, the Fed’s actions still affect the rates they see every day on products like private student loans and credit cards.
“If you’re a consumer, now is the time to ask yourself, what are your spending habits? Where could my money be growing the most and what are my options?” said Leslie Tayne, a debt relief attorney at Tayne Law in New York and author of “Life & Debt.”
Here are three key strategies to consider:
With a rate drop, the prime rate also drops, and interest rates on variable-rate debt (like credit cards, adjustable-rate mortgages, and some private student loans) are likely to follow, lowering your monthly payments.
For example, credit card holders might see a reduction in their annual percentage rate, or APR, over the course of one or two billing cycles. But even then, APRs will only decrease in extremely high cases.
Rather than waiting for a small adjustment in the coming months, borrowers could switch now to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a personal loan, Tayne said.
Olga Rolenko | Moment | Getty Images
Many homeowners with ARMs, which are indexed to a variety of indices such as the prime rate, Libor or the 11th Interest rates on district funds could also drop, but not immediately, since ARMs typically reset only once a year.
In the meantime, options for homeowners to gain additional breathing room are dwindling. “The best option may be to wait and refinance,” McBride said.
Private student loans also tend to have a variable rate tied to the prime rate, the Treasury rate, or another rate index, meaning that once the Fed begins cutting interest rates, the interest rates on these private student loans will begin to fall.
Eventually, borrowers who already have variable-rate private student loans may also be able to refinance them into a cheaper fixed-rate loan, according to higher education expert Mark Kantrowitz.
Currently, fixed rates on a private refinance are as low as 5% and as high as 11%, Kantrowitz said.
Even though borrowing will become cheaper, these lower interest rates will hurt savers.
With rates on online savings accounts, money market accounts and certificates of deposit all set to drop, experts say now is the time to lock in some of the highest yields in decades.
Right now, the best-paying online savings accounts and one-year CDs are yielding more than 5%, well above the inflation rate.
The opportunity to earn 5% per year on these cash investments may not last very long.
Howard Hook
Wealth Advisor with EKS Associates
“One thing you might want to do is consider investing any spare cash you have in a higher-yielding money market fund,” said Howard Hook, a certified financial planner and senior wealth advisor at EKS Associates in Princeton, New Jersey.
“Money market brokerage accounts typically offer higher rates than money market or bank savings accounts,” he said in an emailed statement. “If the Fed does indeed plan to cut rates five times in the next 18 months (as currently expected), then the opportunity to earn 5% a year on these cash investments may not last very long.”
If you’re considering a major purchase, such as a home or car, it may be worth waiting, as lower interest rates could reduce the cost of financing in the long term.
“By timing your purchase to coincide with lower rates, you can save money over the life of the loan,” Tayne said.
Although mortgage rates are fixed and tied to Treasury yields and the economy, they have already started to fall from recent highs, largely because of the prospect of a Fed-induced economic slowdown. The average rate on a 30-year fixed-rate mortgage is now just over 7%, according to Bankrate.
However, lower mortgage rates could also boost demand for housing, which would push up prices, McBride said. “If lower mortgage rates lead to higher prices, that’s going to offset the affordability benefit for potential buyers.”
When it comes to auto loans, there’s no doubt that inflation has had a huge impact on financing costs and vehicle prices. According to Bankrate, the average rate on a five-year new car loan is now close to 8%.
But in this case, “financing is a variable, and it’s frankly one of the smallest variables,” McBride said. For example, a quarter-percentage-point reduction in rates on a five-year, $35,000 loan works out to $4 a month, he calculated.
In this case, as in many other situations, consumers would have a greater incentive to improve their credit scores, which could open the door to even more favorable loan terms, McBride said.
News Source : www.cnbc.com
Gn bussni