For the first time in a decade, the Federal Reserve is likely to cut interest rates. Citing the “crosscurrents” of slowing global growth, uncertainty over trade policy, and static prices, the central bank will preemptively shave 0.25 percent from the fed funds rate, putting the new range at 2-2.25 percent.
A rate cut might seem strange, considering that the first estimate of Q2 GDP came in at a decent 2.1 percent annualized pace. In fact, that report showed that consumer spending accelerated by 4.3 percent, up from 1.1 percent in Q1, and government spending jumped by 5 percent, the largest in a decade. Those levels were not enough to offset a 0.6 percent slide in business investment, the first drop since 2015 and the sixth straight quarterly decrease in residential investment. The trade war with China acted as another speed bump, as exports fell 5.2 percent and imports edged up just fractionally.
The Fed is likely to focus on year-over-year growth, which slowed to 2.3 percent, the weakest pace in two years, as further justification for their action. Grant Thornton Chief economist Diane Swonk notes that fed officials now realize that they “may have overshot and tightened too aggressively in 2018” and if a big slowdown occurs, they do not want to shoulder the blame for being too hawkish.
So, how does the Fed rate cut impact YOU?
Savers: The past few years have been good ones for savers, but the tide could be turning now. It may be worth locking in longer term CDs with low fees, if you are worried about the economy losing steam and more cuts in the future. You can check out current rates for various savings products here and here.
Borrowers: With rates headed lower, some borrowers could see immediate relief.
Credit cards: As interest rates increased over the past few years, those with credit card balances paid more. According to MagnifyMoney.com, Americans paid banks $113 billion in credit card interest last year, up 12 percent from the $101 billion in interest paid in 2017, and up 49 percent over the last five years. That’s because most credit card interest rates are tied to the prime rate, which is about three percentage points above the federal funds rate. When the federal funds rate moves up or down, the prime rate and credit card rates follow soon after.
Even a small decrease will be a relief to the 44.4 percent of credit card account holders that do not pay off their balance in full each month. The average APRs on credit card accounts assessed interest are now 17.14 percent, up nearly 4 percentage points in five years, according to the Federal Reserve. Given that the market remains competitive, cardholders should continue to shop around and ask for lower rates.
Auto loans: Car manufacturers often finance new car loans, which are partially impacted by rate moves. Given that car sales are declining, some companies may offer better rates than others, so be sure to shop for the overall deal as well as the rate.
Home loans: Home equity lines of credit (HELOCs) are usually linked to the prime rate, so when the Fed lowers its target rate, HELOC rates follow. Long-term mortgage rates key off the 10-year Treasury bond, which the Fed does not control, but 15 and 30-year mortgage rates are hovering near three-year lows, according to Freddie Mac.
Federal Loans: Locked in each academic year. For 2019-2020:
-- Undergraduate: 4.53% (down from 5.05%)
-- Graduate: 6.08% (from 6.6%)
-- Parent PLUS: 7.08% (from 7.6%)
Private loans: Can be fixed or variable and the variable rates key off shorter term rates and change on monthly or quarterly basis, so there could be some relief with a rate cut.
Investors: Just the potential of a Fed rate cut has already boosted U.S. stock indexes to another round of records, as investors wager that lower rates will spur spending and also will make stocks more appealing relative to other asset classes. Bears contend that it’s hard to imagine a much bigger upside for equities, after seeing the best first half of the year for the S&P 500 since 1997. These more pessimistic investors have been buying bonds to prepare for a more pronounced slow down. Who will be right? Well, that will depend on how much the economy slows, the Fed’s future actions, and whether companies can continue to make money going forward.