Article Summary –
The Federal Reserve’s third interest rate cut of the year will likely impact consumer and business borrowing, with borrowers potentially facing disappointment due to the Fed’s plan to cut rates more gradually in 2025 than anticipated. Credit card and mortgage borrowers may see minimal effects, while savers might still benefit from high-yield savings accounts despite lower returns compared to previous months. The Fed is closely monitoring inflation and the job market to determine future rate cuts, which could change rapidly if the economy shows significant signs of deterioration or if inflation rises again.
NEW YORK (AP) — The Federal Reserve’s third interest rate cut this year could impact debt, savings, auto loans, mortgages, and other consumer and business borrowings.
With inflation pressures still a concern and President-elect Donald Trump’s policies potentially fueling inflation, the Fed announced on Dec. 18 that rate cuts in 2025 will be more gradual than previously planned. The policymakers now forecast two rate cuts next year, down from the four projected earlier.
Borrowers hoping for significantly lower loan rates might be disappointed since loans may not decrease much if the Fed proceeds with its plan for two rate cuts next year.
“This might be the last rate cut for a while,” noted Jacob Channel, senior economist at LendingTree. “Trump administration policies might cause inflation or disrupt the economy, prompting the Fed to hold rates steady at their January meeting.”
Depending on Trump’s enacted proposals, additional rate cuts might be delayed until March or later.
Here’s what to know:
Gradual rate cuts have little impact on credit card debt
“Another rate cut is good news this year-end, but it doesn’t significantly affect those with debt,” said Matt Schulz, chief credit analyst at LendingTree. “A quarter-point reduction may slightly reduce your monthly payment. Cardholders should take charge of high interest rates in 2025.”
The average annual percentage rate on new credit card offers is 24.43%, down from 24.92% in September, according to LendingTree. Schulz predicts further modest declines but warns, “Expecting card rates to improve drastically due to the Fed will lead to disappointment.”
Elizabeth Renter, senior economist at NerdWallet, noted that for those with revolving credit card debt, it’s just “a drop in the bucket” compared to high rates.
High-yield savings accounts remain viable
Returns on high-yield accounts have declined along with Fed rate cuts. Despite being less attractive than before, these accounts still offer competitive yields, sometimes near 5%.
“You missed peak rates from months ago,” Schulz said. “But these rates are likely better than at traditional banks.”
Possible mortgage rate easing
The Fed doesn’t set mortgage rates but influences them. Long-term mortgage rates generally follow the 10-year Treasury note yield, affected by inflation expectations and the Fed’s rate.
Thus, the Fed’s rate cuts can indirectly reduce mortgage rates. “Bond market turmoil has caused rates to fluctuate,” Channel said, noting the average 30-year fixed-rate dropped from 6.84% to 6.60% since November 21.
Despite this decline, rates remain above the 2024 low of 6.08% from September. Fixed mortgage rates won’t change unless refinancing occurs.
Auto loans benefit from lower rates
The Fed’s rate reductions in September and November decreased auto loan rates, which fell from 7.3% in July to 6.8% last month, said Ivan Drury, Edmunds.com’s director of insights.
The drop enabled more people to afford new vehicles, sparking a buying spree in November. However, increased demand, partly due to optimism over Trump’s election, pushed prices and payments to record highs.
“Optimism and cash availability has encouraged spending,” Drury noted. Average car financing hit $42,160, with monthly payments at $753, according to Edmunds.
Edmunds forecasts modest auto sales growth next year, from under 16 million to 16.2 million vehicles in 2025.
Fed monitors inflation and job market closely
“The Federal Open Market Committee balances cutting rates to avoid inflation resurgence and not over-tightening the labor market,” said Renter of NerdWallet.
Gregory Daco, EY’s chief economist, suggested Fed Chair Jerome Powell emphasizes a cautious approach to rate cuts at January’s meeting.
“A gradual easing of policy will let us observe economic and inflation trends, adopting a ‘data-dependent’ strategy,” Daco said.
Gradual rate reduction not guaranteed
“The Fed is adaptable for unexpected changes,” Channel stated. “If the economy deteriorates, we may see larger, frequent cuts in the next year.”
He also warned, “If inflation spikes again, rate cuts might be reconsidered.”
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