The best money moves to make before a Fed rate cut

The latest signs that inflation is easing have paved the way for the Federal Reserve to begin cutting interest rates in the fall.

The consumer price index, a key gauge of inflation, fell in June for the first time in more than four years, the Labor Department reported last week.

“With ample signs of a cooling economy, June’s consumer price index certainly constitutes the ‘best data’ on inflation that Fed Chairman Jerome Powell has said we need to see before the Fed starts cutting interest rates ,” Greg McBride said. chief financial analyst at Bankrate.com.

With a rate cut now looking more likely, households may finally get some relief from the high borrowing costs that followed the latest string of interest rate hikes, which pushed the Fed’s benchmark rate at the highest level in decades.

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Fed officials signaled they expect to cut its key rate once in 2024 and four more times in 2025.

The federal funds rate, which is set by the US central bank, is the interest rate at which banks borrow and lend to each other overnight. While that’s not the rate consumers pay, the Fed’s moves still affect the rates they see every day on things like private student loans and credit cards.

“If you’re a consumer, now is the time to say, what does my spending look like? Where would my money go the most and what options do I have?” said Leslie Tayne, a debt relief attorney at Tayne Law in New York and author of Life & Debt.

Here are three key strategies to consider:

With a rate cut, the prime rate also drops, and interest rates on variable-rate debt — such as credit cards, adjustable-rate mortgages, and some private student loans — are likely to follow, lowering your payments. monthly.

For example, credit card holders may see a reduction in their annual percentage yield, or APR, within a billing cycle or two. But even then, APRs will only ease the extremely high rates.

Instead of waiting for a small adjustment in the coming months, borrowers can switch now to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a personal loan, Tayne said. .

Many homeowners with ARMs, which are linked to a variety of indices such as prime rate, Libor or 11^th The District’s cost of funds could also see their interest rate drop — though not immediately since ARMs typically only reset once a year.

Meanwhile, there are fewer opportunities to provide homeowners with additional breathing space. “Your best move may be waiting to refinance,” McBride said.

Private student loans also tend to have a variable rate tied to prime, Treasury bills, or another rate index, meaning that once the Fed starts lowering interest rates, the interest rates on those private student loans will start to fall.

Eventually, borrowers with variable-rate private student loans may also be able to refinance to a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz.

Currently, fixed rates for a private refinance are as low as 5% and as high as 11%, Kantrowitz said.

While borrowing will become cheaper, those lower interest rates will hurt savers.

With rates on online savings accounts, money market accounts and certificates of deposit poised to drop, experts say now is the time to lock in some of the highest returns in decades.

Right now, high-yield online savings accounts and one-year CDs are paying more than 5% — well above the rate of inflation.

“One thing you might want to do is consider investing any idle cash you have in a higher-yielding money market fund,” said certified financial planner Howard Hook, a senior wealth advisor at EKS Associates in Princeton, New Jersey.

“Money market brokerage accounts typically pay higher rates than money market or bank savings accounts,” he said in an emailed statement. “If the Fed really is looking to cut rates five times over the next eighteen months (as currently projected), then the opportunity to earn 5% per year on those cash investments may not last much longer.”

If you are planning a large purchase, such as a house or car, then it may be beneficial to wait, as lower interest rates can reduce the cost of financing down the road.

“Timing your purchase to coincide with lower rates can save you money over the life of the loan,” Tayne said.

Although mortgage rates are fixed and tied to Treasury yields and the economy, they have already begun to decline from recent highs, largely due to the prospect of a Fed-induced economic slowdown. The average rate for a 30-year fixed-rate mortgage is now just over 7%, according to Bankrate.

However, lower mortgage rates could also spur demand for home purchases, which would push prices higher, McBride said. “If lower mortgage rates lead to an increase in prices, that will offset the affordability benefit for potential buyers.”

When it comes to car loans, there’s no doubt that inflation has hit financing costs — and vehicle prices — hard. The average rate on a five-year new car loan is now nearly 8%, according to Bankrate.

But in this case, “funding is a variable, and frankly it’s one of the smallest variables,” McBride said. For example, a quarter of a percentage point reduction in rates on a five-year, $35,000 loan is $4 a month, he calculated.

In this case, and in many other situations as well, consumers would benefit more from improving their credit scores, which could pave the way to even better credit terms, McBride said.