Fed Rate Cut Probable in September: How Interest Cuts May Affect Your Finances

In a speech on Friday, Federal Reserve Chair Jerome Powell hinted at the possibility of upcoming interest rate cuts, a move that could significantly impact global markets and individual Americans.

Powell emphasized that any potential adjustments would be contingent upon economic data. However, his comments were interpreted by Fed watchers as an indication that the central bank’s monetary policy committee may consider lowering rates at its upcoming meeting in mid-September.

Greg McBride, chief financial analyst at Bankrate, cautioned that while a September rate cut is highly probable, it is not yet finalized.

Investors responded favorably to the prospect of a rate cut, with the Dow surging by 800 points on Friday to reach a new record high.

Should the Fed choose to lower interest rates, here’s what you can expect in terms of its impact on your financial life:

When the Fed reduces its key overnight lending rate, savings and loan rates typically follow suit, potentially even starting to dip slightly prior to any decision affecting your savings. According to McBride, “Savings rates and CD rates will start to slide, and that will pick up speed as we get closer to the actual resumption of rate cuts.”

However, one constant remains: High-yield savings accounts from FDIC-insured online banks will continue to offer some of the highest interest rates for your savings due to increased competition for deposits.

If you have a CD with a favorable rate, that rate will not change, and you’ll receive the agreed-upon interest. If your CD is “callable” and the bank decides to recall it, they will return your principal and any accrued interest to you.

Any loans with fixed rates that you have already taken out will remain unchanged. New loans you may seek in the future could benefit from lower rates due to the anticipated rate cut.

Unlike the preemptive declines on interest earned by banks on savings, you are unlikely to see lenders reduce the interest rates you must pay them before they are required to do so. As Bobbi Rebell, a certified financial planner at CardRates.com, explained, “When it is to the advantage of the lender, rates may be slower to move lower than consumers would like.”

Take personal loans as an example. “They tend to lag Fed rate cut changes to the downside,” Rebell noted, but added that a stronger credit score generally leads to more favorable loan terms for borrowers.

Your credit card issuer will adjust your variable rate to mirror any rate cut made by the Fed, though there could be a delay of up to three months. However, McBride warned that while a reduction in interest rates may provide some relief, it is unlikely to result in substantial savings given the high average credit card rate of 20.13%.

Instead, you might find better success negotiating a lower rate with your card issuer directly. A Lending Tree report from last year found that approximately three-quarters of cardholders who requested a lower rate were successful, by an average of 6.5 percentage points.

In the home buying or mortgage refinancing market, it remains unclear to what extent a Fed rate cut will influence interest rates on its own. Mortgage rates are not directly tied to Fed moves but instead are affected by changes in the yield of the 10-year US Treasury note. Economic factors such as inflation, debt, and deficits can impact this yield, potentially limiting the decrease in mortgage rates.

“Inflation, debt, and deficits have kept mortgage rates elevated and will likely limit the extent that mortgage rates come down,” McBride said. “Unless the economy starts to experience significant difficulties, we probably won’t see mortgage rates moving sustainably below 6% for some time.”