From Mortgages to Credit Cards, Here's How Recent Fed Rate Cuts Are Affecting Financial Products

After hiking rates at a rapid pace in its battle against inflation, the Federal Reserve is signaling it will walk those rates back down at a more measured pace. Following a larger-than-normal cut of 0.5 percentage points in September, the central bank's rate-setting committee dropped its benchmark rate by another 0.25 percentage point last week.

The Fed’s benchmark federal funds rate influences the cost of borrowing for individuals and businesses. In theory, with the two cuts already in place and Wall Street assigning a 65% probability of another 0.25 percentage point cut in December, it should get cheaper for individuals and businesses to borrow money. On the flip side, banks will be less willing to pay generous interest rates on your deposits as the federal funds rate comes down.

But in most cases, it’s not a straight pass-through, and it can take a while before consumers actually feel the effects of the Fed’s rate adjustments to filter through to credit cards, savings accounts, mortgages and other products.

Here’s what borrowers and savers can expect to happen to rates over the coming months — and why the impact of Fed actions on the interest rates of everyday financial products isn’t always easy to see.

Savings accounts and certificates of deposit

People who locked in CD rates above 6% can pat themselves on the back, because the days of those kinds of returns are in the past. But the good news is it's still possible to find banks and credit unions offering yields at or close to 5% on CDs, and rates of 4% or higher on savings accounts, even as the average savings account rate is an unimpressive 0.45%, according to the FDIC.

Still, “most of them are going to continue to pull rates down a little bit more, if they haven't already,” says Bryan Johnson, chief financial officer at CD Valet, an online marketplace for CD accounts.

While the interest rates banks and credit unions offer on products like savings accounts and CDs are influenced by the fed funds rate, those banks’ funding needs also factor into the equation, says David Goeden, head of retail and online banking at LendingClub. How much competition there is for your cash also plays a role, since banks are more likely to sweeten their terms if they’re concerned about getting new customers and keeping existing ones from walking their dollars out the door.

Finance experts say you can still find places where you can get good returns on your money — if you’re willing to do the legwork of comparison-shopping.

“Customers need to shop around,” Goeden says. “Look at companies that consistently have higher rates," he advises. Putting your money in a bank or credit union that consistently offers decent rates can be smarter than moving your money constantly to rate-chase the highest returns, since the highest rates tend to come with strings attached, like high minimum balances or, in the case of CDs, oddball terms that can be difficult to keep track of.

Credit cards

Virtually all credit cards today have variable interest rates, typically tied to the prime rate. (As a rule of thumb, the prime rate is calculated by adding three percentage points to the fed funds rate.) So when the Fed changes rates, that change will typically be reflected by your credit card rates within a statement cycle or two.

The Fed's recent rate-hiking cycle has brought credit card annual percentage rates (APRs) to record highs. Fed data shows that the average APR was 21.8% at the end of August, when the effective fed funds rate was 5.3%. By comparison, in February 2022, when the effective fed funds rate was below 0.1%, the average credit card APR was 14.6%.

"Anything that's a variable-rate product that's tied to prime should come down first," says Michele Raneri, vice president and head of US research and consulting at credit bureau TransUnion. "Fixed-rate loans and other products might be next," Raneri says, but she adds that other factors besides just the fed funds rate feed into what lenders charge, with borrowers' credit histories a key variable. While credit card APRs are generally the prime rate plus a set margin — which hit an all-time high of just over 14% last year — issuers charge higher interest rates to customers with fair or poor credit who they determine to be at a greater risk of falling behind on their payments. Credit card delinquency rates have been creeping up, albeit from a low level.

"At the intersection of rates and credit, what’s important is credit quality for individuals," Raneri says. In other words, if you're hoping to get a better interest rate on your next credit card, make sure your credit score is as high as you can get it.

Auto loans

Rates on car loans, along with other types of fixed-rate installment loans, remain in somewhat of a holding pattern, according to Raneri. "We're seeing a lot of interest rates stay static," she says. "I don't know that we’re seeing big changes, [because] it's not just about the fed rate, it's also about the prime rate and Treasury bills," she says.

As rates hold steady, lenders today want to see top-tier credit scores. "We’ve seen lenders are expecting better credit quality" when making car loans, Raneri says. "Super-prime originations grew in the double digits year over year," while originations for other credit tiers were flat or on the decline.

If you're waiting on the sidelines for car loans to come down before purchasing a vehicle, this waiting period can be a good opportunity to boost your credit score, so you'll be able to get the most favorable terms when rates do tick down, Raneri says.

"You’re only going to get a better interest rate if you have a good credit score. Having a little more time to do that might not be a bad thing."

Mortgages

The long-term nature of mortgage loans makes them less directly affected by Fed policy actions, a dynamic that can result in sometimes-confusing market signals. For a 30-year mortgage, the average fixed rate peaked at 7.78% last November, according to Fannie Mae data. Since then, it has moderated a bit, dropping to just over 6% back in September the week after the Fed lowered rates for the first time since 2020.

You would be in good company if you assumed that rates would drop further when the Fed lowered interest rates again. Instead, rates have climbed to 6.79% since that September trough. Unfortunately for frustrated buyers, investors had already priced in the Fed’s 0.5 percentage point move in September. When subsequent data showed an economy that was healthier than expected, investors tempered their expectations for more cuts, sending mortgage rates back up.

The long length of most mortgages means that mortgage rate movements are closely correlated with movements of the 10-year Treasury note than the federal funds rate. David Berson, chief U.S. economist at investment firm Cumberland Advisors, explained to Money that investors are putting more weight on expectations about future inflation and economic activity than Fed activity. Those assumptions are keeping mortgage rates elevated.

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