What another Fed cut could mean for your personal borrowing costs

The Federal Reserve is expected to lower its benchmark rate by a quarter percentage point at its meeting this week.

The move would mark the Fed’s third consecutive rate reduction this year, following the September and October cuts, bringing the federal funds rate to a range of 3.50%-3.75%.

President Donald Trump has been sharply critical of Fed Chair Jerome Powell, arguing that rates should be significantly lower. Trump has also said he knows who he intends to choose to succeed Powell, with National Economic Council Director Kevin Hassett considered to be the front-runner.

If appointed, Hassett would take over a Fed that is currently torn between officials who think additional rate cuts are warranted and those who are reluctant to ease monetary policy further.

The federal funds rate, set by the Federal Open Market Committee, is the rate at which banks lend to one another overnight. Although it’s not the rate consumers pay, the Fed’s moves still influence the rates individual borrowers pay on many types of consumer loans.

That said, for most Americans, a Fed rate cut does not guarantee lower borrowing costs.

“Anyone who is exposed to variable rate debt, which is benchmarked off of prime, could see a reduction in their borrowing costs — but for the mortgage market and any other longer-term rates, we could even see an increase,” said Brett House, economics professor at Columbia Business School. “It depends on the duration of the product and the product itself.”

Short-term rates are more closely pegged to the prime rate, which is the rate that banks charge their most creditworthy customers — typically 3 percentage points above the federal funds rate. Longer-term rates are also influenced by inflation and other economic factors.

Since most credit cards have a short-term, variable rate, there’s a direct connection to the Fed’s benchmark.

When the Fed lowers rates, the prime rate comes down, too, and the interest rate on your credit card debt is likely to adjust within a billing cycle or two. Still, credit card APRs will only ease off extremely high levels. 

“To go from 20% to 18%, that doesn’t change your situation,” said Stephen Kates, a financial analyst at Bankrate. “It doesn’t put you in a position where that balance is meaningfully easier to manage.”

Auto loan rates and federal student loans are fixed for the life of the loan and won’t adjust with the Fed’s move, although anyone shopping for a car or taking on education debt in the year ahead could benefit if borrowing costs come down on new loans.  

Longer-term loans, like mortgages, make up the largest share of consumer debt, but those loans are even less impacted by the central bank. Both 15- and 30-year mortgage rates are more closely tied to Treasury yields and the economy.

“The bond market doesn’t believe that inflation is conquered,” said Professor House, noting that lack of faith has kept mortgage rates in the same narrow range.  

Also, since most people have fixed-rate mortgages, their rate won’t change unless they refinance or sell their current home and buy another property. 

Other home loans are more influenced by the Fed’s moves. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away.

For Americans who are waiting on some relief from high borrowing costs, increasing your credit score is a more effective way to secure preferred rates on credit cards, auto loans, personal loans and even mortgages, according to Bankrate’s Kates.

“The best way to improve your borrowing costs is to improve your credit score and not have to worry about what the Fed is doing,” he said.

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