On Thursday, the Federal Reserve announced a quarter-point reduction, or 25 basis points, to its benchmark interest rate. This comes shortly after President-elect Donald Trump's victory in the 2024 election.
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| The Federal Reserve Building in Washington, D.C. Joshua Roberts | Reuters |
Economic uncertainty was already high leading up to the election due to prolonged inflation, which had left many Americans struggling with the rising cost of living.
Recent data shows that inflation has started to ease, nearing the Fed’s target of 2%, which has created conditions favorable for this rate cut. This is the second rate cut in recent months, following a half-point reduction on September 18.
The federal funds rate primarily influences overnight borrowing costs for banks but also impacts consumer credit costs across sectors.
Economic Indicators and Presidential Influence
Since the Fed’s last meeting, the personal consumption expenditures (PCE) price index—the Fed’s preferred measure of inflation—rose only 2.1% year-over-year. Although the Federal Reserve operates independently from the government, Trump has been vocal about his desire for lower interest rates.
For households affected by elevated borrowing costs after a series of 11 rate hikes between March 2022 and July 2023, this rate cut is welcome news. However, it may take time before consumers feel the benefits in their day-to-day finances.
According to Greg McBride, chief financial analyst at Bankrate.com, the Fed’s rate cuts have moderated rates slightly, but consumers may not see a major change just yet. “The Fed raised rates from the equivalent of the ground floor to the 53rd floor of a skyscraper,” McBride noted. “Now, they’re on the 47th floor, and another rate cut might take us to the 45th floor—but the view isn’t drastically different.”
Let’s examine how a Fed rate cut might affect key areas of personal finance in the coming months.
Credit Card Rates
Since most credit cards have variable rates, any changes in the Fed’s rate immediately impact these interest rates. In the last hike cycle, average credit card rates rose from 16.34% in March 2022 to over 20%, a near-record high.
While APRs have begun to decrease slightly with the recent Fed cuts, they remain high. Matt Schulz, a credit analyst at LendingTree, noted that “while they’ll likely continue to fall over the coming months, it won’t translate into substantially lower credit card bills anytime soon.”
Schulz recommends that cardholders seek lower rates through balance transfer offers, negotiate with issuers, or shop around for better terms rather than relying solely on Fed rate cuts for savings.
Trump also proposed capping credit card interest rates at 10%, but this measure would require approval from Congress and could face pushback from the banking industry.
Auto Loans
Auto loans have become more expensive in recent years, with rates now around 7% for a five-year new car loan, compared to 4% before the rate hikes began. Although auto loans are typically fixed, higher prices for vehicles and rising loan rates have made financing a car “increasingly difficult to manage,” says Jessica Caldwell, Edmunds’ head of insights.
Rate cuts from the Fed are expected to make auto loans more affordable in the near term, possibly pushing average rates below 7%, with the added effect of increased competition among lenders.
During his campaign, Trump proposed making car loan interest tax-deductible, though this too would need congressional approval.
Mortgage Rates
Housing affordability has suffered due to the rapid rise in mortgage rates since the pandemic. Even though mortgage rates are linked to the economy and Treasury yields, rather than the federal funds rate, Fed cuts can exert some downward pressure.
Michele Raneri, vice president of U.S. research and consulting at TransUnion, commented, “Continued rate cuts could eventually bring down mortgage rates, which have stayed stubbornly high.” Currently, the average 30-year fixed mortgage rate is 6.81%, according to the Mortgage Bankers Association.
However, Jacob Channel, senior economist at LendingTree, warns that mortgage rates may remain high as long as there is uncertainty about economic prospects. “As long as investors are concerned about what lies ahead, Treasury yields and mortgage rates will struggle to fall and stay down,” Channel said.
Student Loans
For federal student loan borrowers, the impact of rate cuts is minimal since these loans have fixed interest rates. Private student loans, however, may be affected if they carry variable rates tied to benchmarks like the Treasury bill.
According to higher education expert Mark Kantrowitz, a quarter-point rate cut would reduce monthly payments on variable-rate loans by about $1 to $1.25 for every $10,000 in debt.
Borrowers with private loans could benefit from refinancing into a fixed-rate loan if rates decline further, though converting federal loans to private would mean giving up protections like income-driven repayment and loan forgiveness options.
Savings Accounts and CDs
While Fed rate cuts don’t directly impact deposit rates, there’s often a correlation. After the recent rate hikes, high-yield online savings accounts and CDs offered competitive rates, sometimes over 5%—a level unseen in decades.
Greg McBride from Bankrate pointed out, “Yes, interest on savings accounts, money markets, and CDs will decline slightly, but the most competitive yields still comfortably outpace inflation.” One-year CDs, for example, now average 1.76%, though the top CD rates are closer to 4.5%, nearly rivaling high-yield savings accounts.
Market Outlook
As companies remain private for longer, investors seeking alpha generation and diversified portfolios are likely to continue turning to private markets. Private investments, particularly in the form of new open-end investment funds, offer high-net-worth individuals opportunities to increase alternative exposure with some liquidity benefits.
However, these open-end funds don’t guarantee liquidity under adverse conditions, as redemptions might be limited.
For individual investors, Trump’s promises of broader financial relief were central to his campaign, but the implementation of his proposed measures will require legislative approval. In the meantime, careful investment strategy and professional guidance will remain crucial for navigating the evolving financial landscape.
As more options become available to investors across wealth levels, a diversified approach across private and public markets could become the norm for achieving long-term financial resilience.
