The Federal Reserve Has Cut Interest Rates Three Times in 2019. Here's What It Means for You
The U.S. economy has been growing for more than a decade, unemployment is near an all-time low, and the number of people with over $1 million in their 401(k) accounts is at a record high.
So why did the Federal Reserve feel compelled to bolster the economy by cutting interest rates for the third time this year? And what do the rate cuts mean to you?
In a press conference on Wednesday, Fed Chairman Jerome Powell said that the latest interest rate cut was intended "to help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks."
Though Powell made no explicit mention of President Donald Trump's trade war with China, the Fed chair said that "business investment and exports remain weak, and manufacturing output has declined over the past year," adding that "sluggish growth abroad and trade developments have been weighing on those sectors." To address these concerns, and to keep the American economy growing at least at its current "moderate rate," Powell announced an interest rate cut of 1/4 percentage point. The move follows quarter-point cuts in July and September, and brings the benchmark federal funds rate down to the range of 1.5 to 1.75 percent.
What do these numbers mean to everyday Americans? Well, the gist is that the Fed's rate cuts are good for borrowers but not so good for savers. The Fed's moves also reflect concerns about the strength of the U.S. economy overall — and a flagging economy would obviously be not so good for everyone.
As for practical takeaways from the Fed's latest announcement, the consensus is that it's highly unlikely that there will be more interest rate cuts in the near future. In other words, the situation could be as good as it gets for borrowers for months to come.
So it very well may be the perfect time to buy a house, refinance your mortgage, or take out a home equity loan, if you've been considering any of these moves. The Fed's moves also have implications for student loans, credit card APYs, and old-fashioned bank savings accounts. Here are more specifics regarding what Federal Reserve interest rate cuts mean for you.
Refinancing Mortgages and Home Equity Loans
By far, mortgages are the largest sources of consumer debt, accounting for over $9 trillion of debt nationally. So when there's even a slight change in interest rates on mortgage loans, the impact can be substantial for borrowers.
Mortgage rates tend to mirror Fed interest rate changes, with fixed-rate 30-year mortgages under 4% lately, compared to nearly 5% a year ago. In other words, it's cheaper to buy a house now. On the other hand, your monthly payments won't change if you've got a fixed-rate mortgage — unless you refinance.
The general rule is that refinancing can be in your best interest, so to speak, if you can lower your rate by at least 0.5%. Bear in mind that the process of refinancing isn't cheap. There are generally hefty fees involved — expect costs to add up to $3,000 to $5,000 — so it only makes sense to refinance if you plan on staying in your home for many years.
"Mortgage rates are certainly favorable if you're interested in refinancing, and even homeowners with fairly recent vintage loans originated a year ago should be able to trim their monthly payment by a fair amount," Keith Gumbinger, vice president of mortgage information site HSH.com, told Money via email.
Say a homeowner took out a $200,000 mortgage last year at 5%. According to Gumbinger's calculations, that homeowner would decrease his or her payments by roughly $147 per month by refinancing today at 3.75%, even after factoring in a few thousand dollars for refinancing. Refinancing under these conditions could result in the homeowner paying about $45,000 to $50,000 less in interest over the course of a 30-year mortgage, Gumbinger estimates.
As for a home equity loan or a home equity lines of credit (HELOC), Gumbinger says that the terms are typically tied directly to Fed interest rates, so right about now is indeed an opportune time to borrow in order to replace your roof or take on another home improvement project.
However, depending on the amount you need to borrow for renovations, the amount you'll save with lower interest rates could be negligible. What's more, it's wise for homeowners to make renovations based on their needs, rather than in reaction to a minor change in the cost of financing.
"If it is a good time to renovate the kitchen now it probably was also a good time to do so when rates were slightly above these levels," Gumbinger said. "Except you may have been rewarded a bit for your procrastination."
Bank Savings Accounts
While lower interest rates can benefit borrowers, they can hurt savers. Many banks offer an APY of 0% (or close to it) on standard customer savings accounts, and the return you get from bank savings accounts will only get worse as the Fed cuts interest rates.
Even online banks, which generally offer higher-yield savings accounts, have been slashing the APY (annual percentage yield) on savings accounts in reaction to moves by the Fed. Ally Bank, a digital banking leader regularly rated as Money's Best Online Bank, cut its savings account APY to 1.8% in early October. That's better than 0%, obviously, but it's a fairly significant dip compared to the 2.2% APY offered by Ally just a few months ago.
The takeaway is that you'll be earning less money on cash stashed in a savings account. So, it could be a good time to reevaluate where you're keeping your money, to ensure that it's working for you. Once you have an adequate emergency fund saved up, you might consider investing whatever extra money you have left, instead of watching a high balance sit in a savings account earning little to no interest.
We always advise that you pay off credit card balances in full every month, if you can. But if you're carrying a balance on your credit card every month, it's best to have the lowest interest rate possible.
Most credit cards have variable rates that are directly related to Fed interest rates. Average credit card interest rates rose 4 percentage points over a five-year period ending in early 2019, according to Federal Reserve. But later in the year, in the aftermath of the Fed's rate cuts, average credit card interest rates have decreased, from 17.14% in the second quarter of 2019 to 16.97% in the third quarter.
Credit card interest rates should continue to drop marginally in response to Fed rate cuts. But you may see little or no benefit, unless your credit card company actually lowers your account APY — which is not guaranteed (not all cards have variable rates), and might not happen for a few billing cycles if it happens at all.
What's more, the amount you'll save with a lower credit card APY is directly related to the size of your balance. In other words, if you're deeper in credit card debt, you'll "save" more with a lower interest rate. It's obviously much better to figure out a way to pay off your credit card balance in full, instead of being excited that you're paying a few dollars less in interest on that balance every month.
If you're frustrated with how much you're paying in interest on your credit card balance, by all means call up and negotiate a lower interest rate. Also, it may be worth applying for a low-interest credit card, and steer clear of cards with high APYs — retailer-affiliated "store" credit cards are notorious for this — if you know you can't pay off the balance in full regularly.
For most people planning to borrow money for college or paying off their student loans, the Federal Reserve’s actions won’t have an immediate effect. The large majority of student loans are issued by the federal government, and federal interest rates are fixed based on the year you take out the loans. Interest rates are set annually each May, based on the 10-year Treasury note rates, and they take effect at the start of July.
That means borrowers with older loans will continue to pay their same fixed rates, while undergraduate students this year will pay 4.5% and graduate students will pay between 6% to 7% on their loans, regardless of the Fed’s recent actions.
Of course, the Fed’s decisions and federal student loan interest rates are connected in the sense that they both are tied to broader market and economic conditions. Federal student loan interest rates for the current academic year, for example, dropped after two consecutive years of increases, following a similar trajectory as Fed rate hikes and cuts.
Still, the Fed’s interest rate decisions could affect your monthly payments if you have a private student loan with a variable rate or a federal loan issued before 2006. And with rates falling, graduates looking to refinance student loans may also be able to snag a slightly lower interest rate — if they meet the eligibility requirements for refinancing.