The Federal Reserve prepares for a rate reduction, and its implications for your finances.

• The Federal Reserve kept rates steady at the end of its two-day meeting on Wednesday, but took a step towards the first rate cut in four years.
• For consumers, the days of sky-high borrowing costs may be numbered.

The Federal Reserve announced Wednesday that it will leave interest rates unchanged.

The anticipated September rate cut is good news for Americans facing high interest charges due to recent signs of economic growth and decreasing inflation.

"According to Brett House, an economics professor at Columbia Business School, consumers can have confidence in the U.S. economy as inflation decreases, growth slows down, and price pressures ease."

Since the Covid-19 pandemic, inflation has persisted as price increases reached their highest levels in over 40 years. In response, the Fed raised interest rates, bringing its benchmark rate to a record high.

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

Inflation is cooling, but more Americans are still struggling financially.

The central bank is planning to lower interest rates for the first time in years in September, which may result in consumers seeing their borrowing costs decrease. Some consumers have already started to see this decrease.

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.

House stated that the initial rate cut will not significantly impact individuals' finances, but it will mark the start of a sequence of rate reductions at the end of this year and into the next, which will have a meaningful impact on people's pocketbooks.

Some experts predict that the Fed's benchmark fed funds rate will decrease from the current range of 5.25% to 5.50% to below 4% by the end of next year.

As we approach the interest rate cut, here's a review of monthly interest expenses for credit cards, mortgages, auto loans, and student debt.

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 more than 20% today, almost reaching an all-time high.

With households facing financial difficulties, credit card balances are increasing and more cardholders are carrying debt from month to month or falling behind on payments.

In 2012, the Philadelphia Federal Reserve reported credit card delinquencies at their highest level, despite banks tightening credit standards and declining new card originations. Additionally, revolving debt balances also reached a new 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, even then, the relief will be minimal as the rates will only ease off extremely high levels, according to Greg McBride, the chief financial analyst at Bankrate.com.

McBride stated that rates won't decline quickly enough to rescue you from a difficult circumstance.

LendingTree's chief credit analyst Matt Schulz advised that the best move for those with credit card debt is to take control of the situation.

""By obtaining a 0% balance transfer credit card, a low-interest personal loan, or by contacting their card issuer for a lower interest rate, they can achieve a 0% balance transfer credit card or a low-interest personal loan, which works more often than you might think," he said."

Mortgage rates

Fixed 15- and 30-year mortgage rates are largely determined by Treasury yields and the economy, but are also affected by the Fed's policy. Home loan rates have already begun to decline, mainly due to the possibility of a slowdown in the economy caused by the Fed's actions.

According to Bankrate, the current average rate for a 30-year, fixed-rate mortgage is slightly above 7%.

Jacob Channel, senior economist at LendingTree, stated that if we receive positive updates on inflation, mortgage rates may continue to decrease. While significant drops are unlikely in the near future, rates may trend back to their 2024 lows in the coming weeks and months.

"We could potentially end the year with the average rate on a 30-year, fixed mortgage closer to 6% than 6.5% or 7%."

In mortgage land, a nearly 50 basis-point drop is not something to be dismissed lightly.

Auto loans

Fixed auto loans have become less affordable due to rising interest rates and car prices, resulting in larger monthly payments.

According to Bankrate, the average rate on a five-year new car loan is now close to 8%.

McBride stated that financing is one of the smaller variables, and a quarter percentage point reduction in rates on a $35,000, five-year loan would result in a monthly savings of $4.

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

Student loans

The interest rates for federal direct undergraduate loans have increased for the 2023-24 academic year, with borrowers paying 5.50% compared to 4.99% in 2022-23. Additionally, the interest rate for the 2024-2025 academic year is 6.53%, which is the highest rate in at least a decade.

The interest rates on private student loans fluctuate based on various benchmarks, resulting in borrowers paying more in interest. The exact amount of interest paid varies depending on the chosen benchmark.

Federal borrowers facing debt struggles can seek relief through economic hardship and unemployment deferments. However, the SAVE income-based student loan repayment plan is currently suspended due to legal challenges.

Although some private loan borrowers may consider refinancing when rates drop, those with better credit may already qualify for a lower rate.

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.

According to Bankrate's McBride, top-yielding online savings account rates have increased and are now paying up to 5.5%, which is above the rate of inflation, making it a rare victory for those saving money.

It's the best time to lock in a certificate of deposit because the yields will not improve after the Fed lowers its benchmark, McBride said.

A high-yield savings account currently offers a rate of more than 5.3%, making it a top-yielding one-year CD.