Financial Moves to Consider Before a Fed Rate Cut

Based on the latest inflation data, the Federal Reserve could start lowering interest rates as early as next month.

“We believe that time is getting closer,” Fed Chair Jerome Powell said in a press conference after the Federal Open Market Committee’s last meeting in July.

For Americans struggling to keep up with skyrocketing interest rates, a likely rate cut in September could provide some relief, especially with the right planning.

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

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Fed officials have signaled that they plan to cut the benchmark rate once in 2024 and four times in 2025.

Some experts say that could push the benchmark federal funds rate from its current range of 5.25%-5.50% to below 4% by the end of next year.

The federal funds rate is what banks borrow and lend money to each other at overnight. While it’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.

Here are five ways to manage your finances in the months ahead:

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

For now, the most profitable online savings accounts are yielding more than 5%, well above the rate of inflation.

While those rates will fall once the central bank lowers its benchmark, a typical saver with about $8,000 in a checking or savings account could earn an additional $200 a year by moving that money into a high-yield account that earns an interest rate of 2.5% or more, according to a recent Santander Bank survey in June. Most Americans keep their savings in traditional accounts, Santander found, which FDIC data show currently pay 0.45%, on average.

Alternatively, “now is a great time to lock in more competitive CD yields at a level that’s well above target inflation,” said Greg McBride, chief financial analyst at Bankrate.com. “There’s no point waiting for better yields later.”

Currently, according to Bankrate, a one-year high-yield CD yields more than 5.3%, or as much as a high-yield savings account.

With a rate cut, the prime rate also goes down, and interest rates on variable-rate debt, especially credit cards, will likely follow, reducing monthly payments. But even then, APRs will only ease to extremely high levels.

For example, the average interest rate on a new credit card today is nearly 25%, according to data from LendingTree. At that rate, if you pay $250 a month on a card with a $5,000 balance, it will cost you more than $1,500 in interest and take 27 months to pay it off.

If the central bank cuts rates by a quarter point, you’ll save $21 and be able to pay off your balance a month early. “That’s not nothing, but it’s a lot less than you could save with a 0% balance transfer credit card,” said Matt Schulz, chief credit analyst at LendingTree.

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

If you are planning a large purchase, such as a house or car, then it may be worth waiting, as lower interest rates could reduce the cost of financing in the future.

“Coinciding with a purchase with lower rates can save you money over the life of your 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 around 6.5%, according to Freddie Mac.

Compared to a recent high of 7.22% in May, today’s lower rate on a $350,000 loan would translate into savings of $171 per month, or $2,052 per year and $61,560 over the life of the loan, according to calculations by Jacob Channel, senior economic analyst at LendingTree.

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

According to Channel, what exactly will happen in the housing market “is still uncertain,” depending on how much mortgage rates fall in the second half of the year and the level of supply.

“It is virtually impossible to predict the right time for the market,” he said.

For those struggling with existing debt, there may be more options for refinancing once rates drop.

For example, private student loans tend to have a variable rate that is tied to the prime rate, Treasury bills, or another rate index, meaning that once the Fed starts cutting interest rates, the rates on those private student loans will also go down.

Over time, even borrowers with adjustable-rate private student loans may 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 range from 5% to 11%, he said.

However, refinancing a federal loan into a private student loan will mean giving up the safety nets that come with federal loans, he added, “such as deferrals, forbearance, income-based repayment, and forgiveness and loan cancellation options.” Plus, extending the term of the loan means you’ll end up paying more interest on the balance.

Be aware of potential loan term extensions, cautioned David Peters, founder of Peters Professional Education in Richmond, Va. “Consider keeping your original payment after refinancing to reduce your principal as much as possible without changing your direct cash flow,” he said.

Similar considerations may also apply to home and auto loan refinancing opportunities, depending in part on the current rate.

Those with a better credit rating may already benefit from a lower interest rate.

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

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

In this case, and in many other situations, consumers would benefit more from paying down revolving debt and improving their credit scores, which could pave the way for even better loan terms, McBride said.