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Understanding Fed Rate Reductions and Their Impact on Your Finances

At O1ne Mortgage, we prioritize consumer credit and finance education. This article aims to provide an objective view to help you make the best financial decisions. For any mortgage service needs, feel free to call us at 213-732-3074.

What Are the Interest Rate Reduction Projections?

The Federal Open Market Committee (FOMC) raised the federal funds rate 11 times between March 2022 and July 2023. Since then, the rate has been steady at a range of 5.25% to 5.5%. In December 2023, the committee indicated that they expected to cut the rate three times in 2024, for a total reduction of 0.75%. Economists expect the first rate cut to occur in May or June.

Further reductions are projected for 2025 and 2026, but these are just projections. The FOMC’s decisions will depend on how quickly the inflation rate cools to the agency’s target of 2%.

How Fed Rate Reductions Impact Borrowing

Installment Loans

The prime rate, influenced by the federal funds rate, helps determine the starting interest rate for loans. If you plan on taking out a personal loan, auto loan, student loan, or home equity loan, waiting for Fed rate reductions could save you money. Fixed-rate loans won’t be impacted by further rate reductions, but variable-rate loans will likely benefit from each rate cut.

Revolving Lines of Credit

If you have a credit card or a home equity line of credit (HELOC), your interest rate is likely variable. This means that both new and existing accounts will likely see interest rates go down along with reductions in the fed rate.

How Fed Rate Reductions Impact Savings

Traditional Savings Accounts

Banks that offer traditional savings accounts typically don’t offer much higher rates when the fed rate is high. As a result, your rate likely won’t go down by much as the FOMC starts cutting rates.

High-Yield Savings Accounts

Banks that offer high-yield savings accounts provide annual percentage yields (APYs) much higher than traditional savings accounts. However, these accounts offer variable rates, so you’ll likely see your APY decline once the FOMC begins cutting its rate.

Certificates of Deposit (CDs)

CDs offer a fixed interest rate, meaning your APY will remain the same for your chosen term. Once the FOMC starts cutting its rate, you can expect APYs for new CDs to start declining. However, if you open a CD before the first rate cut, your fixed rate won’t be impacted.

How to Minimize the Negative Impact of Fed Rate Reductions

If you have some flexibility with your financial plan, there are steps you can take to enjoy the benefits of fed rate reductions while minimizing the drawbacks:

• Hold off on borrowing until interest rates start to decline.
• Look into refinancing existing fixed-rate loans at a lower interest rate.
• Switch to a high-yield savings account to take advantage of higher APYs while you can.
• Consider putting some money in a CD to enjoy a high fixed APY for longer.

The Bottom Line

While economic conditions can influence loan and credit card interest rates, your creditworthiness also has a major impact on your ability to get favorable credit terms. Check your credit score and credit report to evaluate your overall credit health, and consider whether you can take steps to improve your credit score before applying for a loan or credit card.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey.

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