The Federal Reserve is finally lowering rates. Here's what consumers should know

NEW YORK (AP) — The Federal Reserve has cut its benchmark interest rate from its 23-year high, with consequences for debt, savings, auto loans, mortgages and other forms of borrowing by consumers and businesses.

On Wednesday, the Fed announced that it reduced its key rate by an unusually large half-percentage point, to between 4.75 and 5 percent, the first rate cut in more than four years.

The central bank is acting because, after imposing 11 rate hikes dating back to March 2022, it feels confident that inflation is finally mild enough that it can begin to ease the cost of borrowing. At the same time, the Fed has grown more concerned about the health of the job market. Lower rates would help support the pace of hiring and keep unemployment down.

“Recent indicators suggest that economic activity has continued to expand at a solid pace," the Fed said in a statement. “Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress."

More Fed rate cuts are expected in the coming months, with the steepness of the reductions dependent on the direction of inflation and job growth.

“We know that it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation,” Fed Chair Jerome Powell said at a news conference. “The labor market is actually in solid condition and our intention with our policy move today is to keep it there.”

“We don’t think we’re behind — we think this is timely,” he added. "But I think you can take this as a sign of our commitment not to get behind.”

Although taking action now to try to capitalize on lower rates, like shifting money out of a certificate of deposit or refinancing a mortgage, “might be warranted for some, you shouldn’t feel obligated to completely change up your financial strategy just because rates move lower," said Jacob Channel, a senior economist at LendingTree.

“Act cautiously and responsibly," Channel said, "and don’t make any rash decisions based on a single Fed meeting or economic report.”

Eventually, yields for savers will decline as the Fed lowers its benchmark rate.

“As attractive as yields on savings instruments have recently been, it’s wise not to hold too much in cash because these are short-term instruments and their yields are ephemeral,” said Christine Benz, director of personal finance at Morningstar. “The really great yields that we’ve had recently may go lower.”

If you don't have a need for cash right away, you can continue to lock in what are “still pretty decent yields on offer,” she said. In that case, “longer-term certificates of deposit might make sense.”

“Lower interest rates make it harder to maximize savings and preserve the capital built while interest rates have been higher,” said Matt Brannon, a personal finance expert at MarketWatch guides. “An easy short-term move to protect your savings is to shift your funds into a high-yield savings account, which offers higher interest rates than traditional savings accounts... These types of savings accounts will still help you to preserve capital due to comparatively higher interest rates.”

“While lower rates are certainly a good thing for those struggling with debt, the truth is that this one rate cut isn’t really going to make much of a difference for most people,” said Matt Schulz, a credit analyst at LendingTree.

That said, the Fed's declining benchmark rate will eventually mean better rates for borrowers, many of whom are facing some of the highest credit card interest rates in decades. The average interest rate is 23.18% for new offers and 21.51% for existing accounts, according to WalletHub’s August Credit Card Landscape Report.

Still, “the best thing people can do to lower interest rates is to take matters into their own hands,” Schulz said. “Consolidating your debts with a 0% balance transfer credit card or a low-interest personal loan can have a far bigger impact on your debt load than most anything the Fed will do.”

The Fed’s benchmark rate doesn’t directly set or correspond to mortgage rates. But it does have a major indirect influence, and the two “tend to move in the same direction,” said LendingTree's Channel.

To wit, mortgage rates have already declined ahead of the Fed’s predicted cut.

“It goes to show that even when the Fed isn’t doing anything and just holding steady, mortgage rates can still move," he said.

Channel said that the majority of Americans have mortgages at 5%, so rates may have to fall further than their current average of 6.46% before many people consider refinancing.

“With auto loans, it’s good news that rates will be falling, but it doesn’t change the basic blocking and tackling of things, which is that it’s still really important to shop around and not just accept the rate that a car dealer would offer you at the dealership,” said Greg McBride, an analyst at Bankrate. “It’s also really important to save what you can and be able to try to put as much down on that vehicle as you can.”

McBride predicts that the rate cuts and the avoidance of a recession will lead to lower auto loan rates, at least for borrowers with strong credit profiles. For those with lower credit profiles, double digit rates will likely persist for the remainder of the year.

Robert Frick, corporate economist for Navy Federal Credit Union, said that while he thinks a rate cut will work its way into auto loans, it probably won’t happen immediately and people with higher credit scores will likely benefit first.

Loans for new vehicles right now are averaging 7.1%, with used vehicle loans at a much higher 11.3%, according to Edmunds.com.

Those rates, coupled with still-high prices, have sent many possible buyers to the sidelines waiting for rates to drop. Partly as a result, U.S. new vehicle sales rose only a sluggish 2.4% through June.

High prices and rates have also led to more delinquent payments and defaults on auto loans, especially among people with lower credit scores. As a result, Frick said, many lenders will probably try to keep rates high to cover potential losses.

“Rates will be coming down, but we shouldn’t expect them to come down quickly overall,” he said.

Frick suggests waiting for additional Fed rate cuts to come through if possible, especially if you’re buying a used vehicle.

Jeff Schuster, vice president of automotive research for Global Data, said he doubts that modest rate cuts by the Fed will be enough to draw many buyers off the sidelines, unless automakers offer their own low-interest loans and other discounts.

“I think it’s going to take a couple more cuts before we get any substantial relief for those consumers,” he said.

Consumer prices rose 2.5% in August from a year earlier, down from 2.9% in July — the fifth straight annual drop and the smallest since February 2021.

Hiring picked up a bit in August, and the unemployment rate dipped for the first time since March. Employers added 142,000 jobs, up from 89,000 in July. The unemployment rate declined to 4.2% from 4.3%, which had been the highest level in nearly three years.

Those signs indicate that the job market, though cooling, remains sturdy.

The rate at which the Fed continues to cut rates after September will depend in part on what happens next with inflation and the job market, in the coming weeks and months.

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