Fed Reserve to Cut Rates for First Time Since 2024 – Key Moves to Make Now

Federal Reserve Expected to Cut Interest Rates

The Federal Reserve is expected to lower its benchmark interest rate when it concludes its meeting this week. Despite recent inflation data that was higher than anticipated, the market is betting heavily on a 25 basis-point rate cut. According to the CME Fedwatch tool, there's a 96% chance of such a move this month.

Mark Hamrick, a senior economic analyst at Bankrate, noted that the Fed is likely to start cutting rates due to concerns about downside risks in the economy, particularly in the job market. For Americans struggling with high interest charges, a potential September rate cut could offer some relief.

The federal funds rate, set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. While this isn't the rate consumers pay directly, it influences the rates they see daily, from credit cards to car payments and savings accounts. Here’s what to expect and how to position yourself to benefit.

Pay Down High-Interest Debt

Rate cuts are beneficial for those with debt, but a small reduction won’t significantly impact bills. The prime rate will decrease, leading to lower interest rates on variable-rate debt, such as credit cards. However, even with a rate cut, APRs will remain high.

Ted Rossman, a senior industry analyst at Bankrate, said, "Borrowers should get some relief in the coming months, although it's worth pointing out that interest rates are still elevated." Credit cards, which have an average rate of 20.13%, are especially affected.

Experts recommend switching to a zero-interest balance transfer credit card or consolidating high-interest debt with a personal loan. Stephen Kates, a certified financial planner, emphasized focusing on high-interest debt, such as credit cards or car loans with double-digit interest.

While auto loan rates are fixed, many consumers face high payments. Improving credit scores and paying down revolving debt can lead to better loan terms in the future.

Put Your Savings to Work

With the Fed likely to cut rates, savings account and CD rates may also decrease. However, high-yield savings accounts and CDs currently offer rates over 4%, significantly higher than the national average.

Swati Bhatia, head of retail banking at Santander Bank, highlighted that moving money into these accounts can yield substantial returns. A typical saver with $8,000 in a checking or savings account could earn an additional $320 a year by moving to a CD or high-yield account with a 4% or higher rate.

Despite this, many Americans keep their savings in traditional accounts, which average only 0.39% according to FDIC data. Experts suggest taking advantage of current competitive rates before they drop further.

Consider Making a Big Move

Lower mortgage rates could revitalize the housing market, encouraging homeowners to sell their low-rate mortgages from the Great Recession era. Although mortgage rates are tied to Treasury yields, they have already dropped from over 7% in January to just under 6.3% for a 30-year fixed-rate mortgage.

John Hummel, head of retail home lending at U.S. Bank, noted that consumer sentiment around mortgages has improved, leading to more momentum in the market. Additional rate cuts could boost activity later in the year.

Improve Your Credit Score

A strong credit score can lead to better loan terms and lower interest rates. Tommy Lee, senior director of scores and predictive analytics at FICO, advised paying bills on time, keeping balances low, and avoiding unnecessary credit applications.

Maintaining revolving debt below 30% of available credit and regularly checking credit reports for errors can help improve scores. Even a single late payment can reduce a score by 50 points or more.

Understanding that individual actions can have a greater impact on interest rates than the Fed’s decisions is crucial. As Matt Schulz, chief credit analyst at LendingTree, stated, "It is important for people to understand that they can have a far bigger impact on their interest rates than the Fed ever will."