What the Federal Reserve Interest Rate Cut Could Mean for You
The Federal Reserve has cut interest rates again, the second time it did so in 2019. What does this mean and how might it affect your spending decisions?
When the Fed cuts interest rates, it usually means it’s cheaper to borrow money – whether you are applying for a new credit card or taking out a mortgage.
However, lower interest rates are usually not associated with a growing economy. As Anne Sapphire of Reuters reminds us, the Federal Reserve last cut interest rates “at the height of the financial crisis over a decade ago.”
So why cut rates now, after so many years of economic growth and a corresponding increase in interest rates? It is incomprehensible – and I do not want to say that it is incomprehensible to me . There is no consensus as to why such a rate cut could occur, even among politicians speaking on his behalf. The most likely conclusion is that this is more about a global economy than a national one, as Nick Timiraos of the Wall Street Journal explains:
Fed officials see closer ties between the US economy and the global economy than in the past, and believe that domestic rates cannot rise much higher than in other advanced economies, which have much lower or even negative rates.
It is also unclear what the rate cut might mean for the typical consumer. In the Washington Post, Heather Long notes that credit card interest rates are currently at an all-time high, and a cut may not change anything:
Credit card borrowers are currently paying a record high average interest rate of 17.76%, according to data compiled by CreditCards.com. In theory, this rate should come down as the Fed cuts its benchmark interest rate, but some analysts are skeptical about this for reasons beyond the control of the central bank.
According to Ted Rossman, industry analyst at CreditCards.com, credit card companies have learned to increase commissions and find ways to keep rates higher than the Fed’s rate was supposed to.
“People with credit card debt shouldn’t see the Fed rate cut as a free lunch. They could have paid for it in other ways, ”said Rossman.
On the other hand, Long also notes that the average 30-year mortgage rate is currently the lowest since 2016 (3.75 percent, if you’re wondering). So it’s not all bad for borrowers – provided that you can afford to buy in today’s real estate market, of course.
An interest rate cut could also lead to some fluctuations in the stock market, although the same could happen if the Fed does not cut interest rates, as Sean Langlois of MarketWatch reminds us.
The [sell-off] could happen as early as this week if the Fed doesn’t cut a quarter point on Wednesday.
Basically, we are all waiting to see what comes next. Until then – and even after – continue to practice smart personal finance habits such as comparing interest rates before taking on a mortgage, using a buy and hold investment strategy , and avoiding credit card debt.
This post was originally published on 7/29/19 and updated on 9/18/19 to provide more recent information.