The Federal Reserve's decision to cut interest rates by a quarter point for the third time this year is intended to strengthen the economy.
Everyday Americans can lose some ground.
On the one hand, lower interest rates often mean cheaper loans, which can affect your mortgage, mortgage, credit card, student loan tab and car payment.
However, borrowers cannot get full benefit if the economy is weakened, as the Federal Open Market Committee and Chairman Jerome Powell have suggested it is.
Pending a financial downturn, lenders are less likely to lend money and may even require a higher interest rate to hedge against the risk, according to Richard Barrington, a financial expert at MoneyRates.com.
Consumers are also likely to earn less interest on savings accounts and in some cases lose their purchasing power over time.
"In this case, a Fed interest rate cut wouldn't be very good" for savers or borrowers, Barrington said. [1[ads1]9659002] Here's an overview of how it works:
First, the primary rate, which is the interest rate that banks extend to the most creditworthy customers, is usually 3 percentage points higher than the federal fund rate. That not only determines your savings rate, it is also the interest rate used for many types of consumer loans, especially credit cards.
With an interest rate cut, the interest rate is also lowered, and credit cards are likely to follow suit. Most credit cards have a variable interest rate, which means that there is a direct connection to the Fed's reference rate.
As a result, cardholders could see a reduction in the annual percentage rate in a billing cycle or two. Considering the average household owes $ 8,602, it will save credit card users about $ 1.6 billion in interest, according to a WalletHub analysis.
However, credit card debt will continue to be expensive, with APRs still only slightly down from all time high.
A quarterly decline of around 17.5% saves someone who pays minimum payments against average debt around $ 1 a month, according to Ted Rossman, industry analyst at CreditCards.com.
"A quarter of a percent decline is not going to save anyone," said Sara Rathner, a credit card expert at NerdWallet.
Better yet, shop for a zero-interest balance transfer offer and "transfer your existing high-interest credit card debt to a new, interest-free card while you still can," Rossman advised. If the economy continues to soften, those conditions could become less generous, he said.
At any time, cardholders can also contact their issuer directly to request an interest rate break.
Only savers recently started taking advantage of higher deposit rates – the annual percentage rate of return banks pay consumers for their money – after interest rates hovered near the rock bottom for several years. After another interest rate cut, these rates are likely to return to near zero.
Because the central bank raised federal fund rates nine times in three years, the highest-yielding accounts now pay more than 2.25%, up from an average of 0.1% before the Fed began raising the reference rate in 2015.
"The good the message is that there is a huge discrepancy between top bank rates and average rates, "said MoneyRates & # 39; Barrington. With an annual percentage return of 2.25%, a $ 10,000 deposit earns $ 225 after one year. At 0.1%, it only makes $ 10.
Still, almost seven in ten Americans earn less than 2%, according to a Bankrate survey.
Such low interest rates have cost depositors $ 1.5 trillion in purchasing power over the decade. since the Great Recession, according to Barrington.
More from Personal Finance:
Americans spend more, but still don't save
How to invest as Warren Buffett
Don't pat yourself on the back of savings
Online banking can typically offer the The highest returns because they come with fewer fixed expenses than traditional bank accounts and savers can generate significantly higher savings rates by shopping around.
"If it means the difference between staying ahead of inflation and losing purchasing power, it's worth it," Barrington said.
Alternatively, consumers may lock in a higher interest rate with a one, three or five year deposit certificate (average peak rate of return of 2.3%, 2.5% and 2.75%, respectively) even if the money is not as accessible as in a savings account, and for that reason does not work well as an emergency fund.
Federal funds and mortgage rates are not directly linked. Rather, the economy, the Fed and inflation all have some influence over long-term fixed-rate mortgage rates, which are usually linked to the yield on US government bonds.
Mortgage rates have already gone down for almost a year, noted Tendayi Kapfidze, chief economist at LendingTree, a marketplace on online loans, with the average 30-year fixed rate now just under 4%, according to Bankrate.
"Loan rates that are so low at the end of an economic cycle are almost outstanding and can be very good at keeping the housing market – and the US economy – afloat," said Ralph McLaughlin, assistant chief economist and executive researcher and insights for CoreLogic.
This makes it a good time to refinance at a lower price, which will save the average homeowner about $ 150 a month, according to Greg McBride, chief financial officer at Bankrate. "The refinancing window is still wide open," he said.
Many homeowners with adjustable rate mortgages, which are linked to a number of indices like Libor or 11. District Cost of Funds, may see their interest rates go down as well, but not immediately because many ARMs reset only once a year.
The Fed's third subsequent interest rate cut will also make it slightly cheaper for consumers to borrow money from an equity line. homeowners to pay for renovations and repairs – or repay their current HELOC loan. Unlike an ARM, HELOCs could be adjusted within 60 days, so borrowers will benefit from smaller monthly payments within a billing cycle or two.
For those planning to buy a new car, the Fed decision probably won't have any major material impact on what you pay. For example, a quarter-point difference on a $ 25,000 dollar loan is $ 3 a month, according to Bankrate.
Automatic lending rates have remained low, even after years of rising interest rates. At the moment, the average five-year new car loan rate is 4.61%, up from 4.34% when the Fed began to raise interest rates, while the average four-year car loan is 5.34%, up from 5.26% over the same time period. , according to Bankrate.
But since new cars are often financed by automakers, this interest rate cut will also cut costs, and that could mean that car buyers will see more favorable prices going forward, Kapfidze said.
Other factors will also play a role in the total cost of a car in the months ahead, including increased material tariffs.