Fed governor Miki Bowman, who is among the most hawkish on the FOMC: "I am not confident that inflation will decline in the same way as in the second half of last year."
She keeps the door open to a rate cut: "Should the incoming data continue to show that inflation is moving…
— Nick Timiraos (@NickTimiraos) August 10, 2024
The Federal Reserve may soon cut interest rates for the first time in four years, possibly as early as September. This move could significantly impact consumers, although the benefits might not be universal. Lower yields on deposits and more favorable terms on credit cards are two potential outcomes of the anticipated rate cut.
U.S. Banks Facing $517 Billion of Unrealized Losses 🚨 – nobody wants interest rate cuts more than them pic.twitter.com/NOt77O7Uen
— Barchart (@Barchart) August 11, 2024
However, Jim Triggs, president and CEO of Money Management International, cautions that the positive impacts may vary depending on how quickly financial institutions pass on the lower rates to consumers. Individuals with poor credit scores might not benefit from refinancing opportunities that lower rates usually offer. The Fed has not adjusted rates since March 2020, at the start of the COVID-19 pandemic.
Since then, it has raised rates by a total of 5.25 percentage points to prevent inflation. Recent economic indicators suggest the economy is cooling, increasing the likelihood of upcoming rate cuts.
There are many people cheering for Fed Cuts, but it all boils down to whether we get a recession. If we don't, stocks are likely off to the races, but if we do, look out below. pic.twitter.com/wgeZdGPAxU
— Barchart (@Barchart) August 9, 2024
The Federal Reserve’s actions primarily influence short-term interest rates and do not directly affect long-term rates like those on 30-year fixed mortgages, which typically follow 10-year Treasury notes.
While mortgage rates have been rising due to inflation concerns, they have started to ease recently and may drop further if the economic slowdown continues. Jack Ablin of Cresset Capital Management noted that existing home sales have dipped to their lowest level since 2010.
Fed’s rate cut impact analyzed
Lower mortgage rates could rejuvenate home sales, making homeownership more accessible. However, lower interest rates could be a disadvantage for savers. Greg McBride, chief financial analyst at Bankrate, recommends locking in yields on certificates of deposit now, as they are likely to drop with an impending rate cut.
Currently, the yields on top-yielding five-year CDs are below 4.5%, down from a peak of 4.85% last October. One-year CD yields have similarly decreased to near or below 5% from 5.75% in December. For those struggling with high debt, Triggs warns that rate cuts alone may not sufficiently reduce monthly payments.
Significant debt may still require substantial financial intervention. Additionally, consumers with low credit scores might struggle to qualify for new loans or refinance existing ones. Even with a relatively low unemployment rate of 4.3%, many consumers face financial challenges.
Money Management International reported a 52% increase in new credit-counseling clients in the first half of 2024 compared to the previous year, with an average unsecured debt of $28,000. Triggs advises that a comprehensive approach, including debt-management plans, budgeting, prioritized debt-payment strategies, and financial education, is often necessary for long-term fiscal health.
