Article Summary –
The Federal Reserve has made its third interest rate cut of the year but plans to be more gradual with future cuts due to elevated inflation pressures and potential inflationary policies from the Trump administration, adjusting their projection from four to two rate cuts in 2025. This gradual approach may disappoint borrowers expecting significantly lower rates, as changes in loan rates, credit card debt, and savings account yields are anticipated to be modest, with mortgage rates indirectly influenced by the Fed’s actions. While auto loan rates have decreased, boosting vehicle sales, the Fed remains cautious, closely monitoring inflation and the job market, ready to adjust its rate strategy if unexpected economic changes occur.
NEW YORK (AP) — The Federal Reserve’s third interest rate cut this year impacts debt, savings, auto loans, mortgages, and consumer and business borrowing.
Despite rising inflation and President-elect Donald Trump’s potential policies increasing inflation, the Fed stated on Dec. 18 that it intends to slow rate cuts in 2025, envisioning two cuts instead of four predicted in September.
Borrowers hoping for significant loan rate drops may be disappointed as the Fed plans only two short-term rate cuts next year.
“This could be the last cut for a while,” said Jacob Channel, a LendingTree senior economist. “Trump’s policies might spur inflation or disrupt the economy, prompting the Fed to maintain rates at their January meeting.”
The Fed might delay further cuts until March or later, depending on Trump’s enacted proposals.
A gradual pace of rate cuts won’t mean much to people with credit card debt
“A rate cut is good news at year’s end, but it doesn’t help much for those with debt,” noted Matt Schulz, LendingTree’s chief credit analyst. “A small reduction may barely affect your monthly debt payment. Cardholders should manage their interest rates themselves in 2025.”
LendingTree reports the average annual credit card rate at 24.43%, down from 24.92% in September. Schulz mentioned potential further modest declines.
However, Schulz warned, “Card rates won’t drastically improve due to the Fed.”
Elizabeth Renter, a senior economist at NerdWallet, stated that for credit card users with ongoing debt, “It’s insignificant for those pressured by high rates.”
High-yield savings accounts remain a good option
Returns on high-yield accounts fell alongside Fed rate cuts. These accounts still offer competitive yields, sometimes near 5%, and merit consideration.
“Peak rates have passed,” Schulz noted. “Yet, these rates are generally better than traditional banks.”
Will mortgage rates ease? Maybe
While the Fed doesn’t set mortgage rates, it influences them. Long-term mortgage rates typically track the 10-year Treasury note, affected by the market’s inflation and Fed rate outlook.
This means Fed rate cuts can indirectly lower mortgage rates, despite not moving directly together.
“Recently, bond market turbulence caused mortgage rates to fluctuate,” Channel observed. “After reaching 6.84% in November, the average 30-year mortgage rate decreased to 6.60%.”
Despite this drop, rates remain above the late September low of 6.08% in 2024. Fixed mortgage holders won’t see rate changes unless refinancing or moving.
Auto loans reflect lower rates
The Fed’s recent rate cuts reduced auto loan rates from 7.3% in July to 6.8% last month, according to Ivan Drury, Edmunds.com’s insights director.
This drop facilitated new vehicle affordability, sparking a November buying spree. Increased demand, partly due to optimism about Trump’s election, also raised average prices and payments to record highs.
“Optimism and available funds encouraged spending, while others remain cautious,” Drury explained.
The average car financing amount rose to $42,160, with monthly payments hitting $753, according to Edmunds.
Edmunds anticipates a slight auto sales increase in 2025, from under 16 million vehicles this year to 16.2 million.
The Fed will closely monitor inflation and the job market
“The Federal Open Market Committee faces a challenge—cut too much, risking inflation, or too little, straining the job market,” said Renter from NerdWallet.
Gregory Daco, EY’s chief economist, suggested Fed Chair Jerome Powell uses a “dark room” metaphor to justify a rate cut pause in January.
“This suggests a gradual policy easing to observe economic and inflation responses, indicating a highly ‘data-dependent’ strategy,” Daco noted.
A more gradual reduction of rates isn’t guaranteed
“The Fed is designed to pivot quickly if unexpected events occur,” Channel said. “Economic deterioration could lead to more cuts over the next year.”
However, he warned, “If inflation spikes again, rate cuts may be reconsidered.”
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