President Jerome Powell said Wednesday that the Federal Reserve is expected to cut interest rates towards the end of January for the first time in a decade, due to the weakening of the global economy and the rise of trade tensions. (July 10)
Taking a loan or accumulating a balance on your credit card may soon cost you a little less.
Federal Reserve Chairman Jerome Powell told Congress Wednesday that the central bank is ready to lower interest rates this month, even with an improved US labor market and a less controversial trade battle. with China.
The goal of any reduction is to make borrowing cheaper for consumers and businesses, to encourage spending and to revive the economy.
The Fed believes that the arguments in favor of a rate cut have recently strengthened. While trade tensions have eased, the outcome of negotiations with China remains uncertain and, if they dissociate, rising tariffs could hurt the economy. In addition, the Fed is worried about the slowdown in global growth and views inflation as a controlled thing, easing fears of an outbreak once borrowing becomes cheaper . Financial markets are forecasting a quarter-point rate cut at the July Fed meeting.
But if the rate cuts are like steroids for the stock markets, do not expect a windfall because the central bank has already sharply increased rates in the past three and a half years, including four increases last year , experts said.
"For consumers, all that this will do is solve a fraction of the nine rate hikes taken since 2015," says Greg McBride, Chief Financial Analyst at Bankrate.com. "All it does is bring you back to what you were 12 months ago."
"Households with a tight budget have limited help," says McBride.
Holden Lewis, an expert in home finance at NerdWallet, says any cuts would keep money in the pockets of consumers.
Those with variable rate loans, such as credit cards and home equity lines, "should expect to see their monthly payments less important," he says. "For those who may be looking to borrow money to fund home renovations, it may be time to do it cheaply."
Rates on credit cards and other loans may fall slightly if the Fed cuts its main short-term interest rate later this month. (Photo: Getty Images)
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Credit card rates are generally tied to the prime rate, which is in turn affected by the Fed's benchmark rate. Although the rate may drop by a quarter of a percentage point, it may not happen as quickly as card issuers often have clauses in their card agreements that allow them to use the prime rate. the highest in force during the previous 60-day period. McBride says.
A quarter point reduction on a $ 5,000 credit card balance would have the effect of reducing the minimum payment of $ 1 a month, a fraction of the $ 9 increases already. enacted.
Real estate lines of credit
Most mortgage lines of credit, or HELOCs, also follow the prime rate. The rate decrease should occur within 30 to 60 days. But that would only reverse one of the Fed's nine previous rate hikes since the end of 2015, so your rate should still be two percentage points higher than it was a few months ago. years.
A quarter point reduction on a $ 30,000 home equity line of credit would reduce the monthly payment by $ 6.25, says McBride. Two cuts of this type would reduce the bill by $ 12.50. In contrast, the nine rate hikes since the end of 2015 increased the same payment by $ 56.
Adjustable rate mortgages
Unlike credit cards and HELOCs, variable rate mortgage rates are changed every year. The impact of Fed rate cuts, and more so on the horizon, could therefore have an immediate impact on your next expected loan adjustment, just as it did when rates went up.
Fixed rate mortgages
The Fed's short-term policy rate is for 30-year mortgages – the most popular home mortgage – and other long-term rates only indirectly. These rates are more in line with inflation expectations and the long-term economic outlook. They have already declined significantly in recent months as concerns about the economy and low inflation have increased.
Many private student loans have variable interest rates that follow the prime rate. When the loan rate adjusts, it depends on what is written in the terms of your loan. For example, your monthly payment will decrease for those who have a normal payout schedule. But if you are on an income repayment plan, your monthly payment will not change, but a lower portion will go towards interest rather than capital.
Federal student loans have a fixed interest rate set by Congress and are not affected by the Fed's move.
Bank savings rate
Bank customers who have finally begun to benefit from higher savings rates could see some of these reduced gains in the future. The rates on one-year and longer-term certificates of deposit have already slightly decreased this year in anticipation of Fed rate cuts, said Ken Tumin, founder of DepositAccounts.com.
Banks are evolving rapidly on such long-term accounts because they do not want to be stuck paying higher returns for long periods of time when rates fall, said McBride.
At the same time, online banks, which are paying much higher rates in the money market and savings accounts, will likely lower their rates within a month or two after a rate cut. of the Fed as their profit margins shrink. A study conducted by Tumin during the Fed's rate cut in 2007 found that banks initially cut savings rates by almost half of the Fed's cut, then caught up with the bank's movement central after several months.
Bernie Sanders and Elizabeth Warren have already promised to do something about student loan debt. That's why the $ 1.6 trillion issue could play an important role in the 2020 election.
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