Economist explains why immediate relief from Federal Reserve's first rate cut in years is unlikely.

• In four years, the Federal Reserve is set to reduce interest rates for the first time.
• When the Fed reduces its benchmark, what can be expected from credit cards, car loans, and mortgages?

The Federal Reserve may cut rates next week due to recent signs of cooling inflation, providing relief for Americans facing high cost of living and interest charges.

Many households were put under pressure due to the spike in interest rates causing consumer borrowing costs to skyrocket.

The 'vibecession' is ending as the economy nails a soft landing.

McBride stated that the impact of the first rate cut, expected to be a quarter percentage point, is very minimal.

"Borrowers can be hopeful that a sequence of rate cuts will collectively significantly reduce borrowing costs, but it will take some time, as one rate cut alone won't be a cure-all."

The CME Group's FedWatch measure indicates that markets are certain that the Fed will begin lowering rates during its meeting on Sept. 17-18, with the possibility of more aggressive moves in the future.

Some experts predict that the Fed's benchmark federal funds rate will fall below 4% by the end of 2025, from its current range of 5.25% to 5.50%.

The rate at which banks borrow and lend to one another overnight is set by the U.S. central bank, the federal funds rate. Despite not being the rate consumers pay, the Fed's actions impact the borrowing and savings rates that consumers experience daily.

The Fed's decision to trim its benchmark will impact rates for various products, including credit cards, car loans, and mortgages. Here's a breakdown of what to expect.

Credit cards

The Fed's benchmark has a direct correlation with the variable rate of most credit cards. Following the rate hike cycle, the average credit card rate increased from 16.34% in March 2022 to over 20% today, which is close to an all-time high.

If you are paying 20% interest or more on a revolving balance, the annual percentage rates will decrease when the Fed cuts rates. However, the decrease will only be slight, according to McBride.

McBride stated that in order to reach 19%, the Fed had to make significant rate cuts, which is still higher than the rate three years ago.

Paying down credit card debt with a 0% balance transfer card is the best move, according to him.

Mortgage rates

The average rate for a 30-year, fixed-rate mortgage decreased by nearly a full percentage point from May to Sept. 11, as per the Mortgage Bankers Association.

Despite a decline in mortgage rates, home prices in many regions remain close to their records, as stated by Jacob Channel, senior economist at LendingTree.

Auto loans

LendingTree's chief credit analyst, Matt Schulz, stated that while auto loan rates may decrease, the intense competition and negotiation process around car shopping are unlikely to change.

According to Bankrate, the current average rate for a five-year new car loan is approximately 7.7%.

Improving credit scores could lead to better loan terms, benefiting consumers, McBride stated.

Student loans

Mark Kantrowitz, a higher education expert, suggests that borrowers with existing variable-rate private student loans may have the option to refinance into a more affordable fixed-rate loan in the future.

Refinancing a federal student loan into a private loan means losing the safety nets that come with federal loans, such as deferments, forbearances, income-driven repayment, and loan forgiveness and discharge options. Furthermore, extending the term of the loan will result in paying more interest on the balance.

Savings rates

The target federal funds rate has a correlation with the yields of deposit rates, although the central bank does not have direct control over deposit rates.

As deposit rates are likely to decrease, he stated that it is crucial to consider the return relative to inflation. Despite the potential decrease in deposit rates, it is still possible to earn a return that outpaces inflation if the money is invested in the right place.