Consumers have been waiting for interest rate cuts since the Federal Reserve stopped raising them a year ago. They may soon get their wish.
Fed policy makers at their July meeting opted to hold the federal funds rate at 5.25% to 5.50%, the range it's sat at since the last increase in July 2023. At the same time, they indicated that inflation was getting closer to the level where they would be comfortable cutting rates. Investors have been betting on rate cuts starting before the end of this year, possibly as early as September.
The highest Fed interest rates in almost two decades have driven up the cost of borrowing for everything from buying a home or automobile to financing a college education. Rates on 30-year mortgages, for example, have sat in the 6 to 8% range nearly all year, according to Freddie Mac. Average credit card rates are currently in the double digits.
But it's not all bad news. High Fed rates also mean high rates on savings accounts and Certificates of Deposit. Here's what you can expect this month's Fed decision to mean for your money.
Why the Fed has left rates high
The Fed uses interest rates to manage inflation by raising or lowering the federal funds rate. When inflation is high, policy makers raise rates to make borrowing more expensive and slow down the economy.
Inflation as measured by the Consumer Price Index peaked in June 2022 at 9.1% and has slowed considerably since then, clocking in at 3% as of June 2024. It's an improvement, for sure, but it's still not quite where the Fed wants it.
The central bank has said many times that it's aiming for a 2% inflation rate. And while the latest data from June shows a slight dip over May, from 3.3% to 3%, we're not quite at that goalpost just yet.
“With the data presently available to the public, a rate cut, or rise, isn't warranted,” says Chris Berkel, investment advisor and president at AXIS Financial. “Inflation year-over-year is trending down toward the Fed's target and employment is still strong. Modifying rates now may be premature.”
Until inflation readings fall further, the Fed is likely to keep rates high, as this quells spending and helps keep inflation under control.
“Inflation is in the process of easing,” says Rob Cook, vice president of Discover Home Loans. Still, he says, “The expectation is that the Fed will wait to get further good inflation data and then take action.”
What the Fed's move means for interest rates
With the Fed keeping things as-is at this month's meeting, the impact on consumer rates will likely be minimal. This could be good or bad, depending on what you do with your money.
Savings account and CD rates
If you have extra cash to stow away, it should be a boon, as rates on savings accounts and CDs have soared in light of the Fed's higher-for-longer stance.
The national average on savings accounts is 0.45%, according to the Federal Deposit Insurance Corporation - significantly higher than the 0.10% seen just two years ago.
If you're willing to shop around, you can find rates 10 times that or more. Poppy Bank is currently offering a 5.5% rate on its online high-yield savings accounts, while Eagle Bank offers a 5.35% rate.
CD rates are high, too. The national average on one-year CDs 1.58%, per FDIC data, but some of the best CDs offer rates nearing 6%.
Fortunately, with the Fed keeping its rate high this month, you can likely expect many of these high-paying savings opportunities to remain - with small potential dips possible along the way.
“One-year CDs are about 0.75% off their highs from late 2023. We would expect these to maybe slowly come down in advance of a rate cut, but not materially”, Berkel says.
Loans and mortgages
If you need to borrow cash, the news isn't as great. When the Fed rate is high, banks pay more to borrow money and, thus, need to charge more to lend it out, too.
That's why rates on credit cards, loans, and mortgages have climbed in recent years, reaching points not seen in decades, in many cases.
The average rate on 30-year mortgages has bounced between 6.6% and 7.79% for the last year, according to Freddie Mac, and since 2022, credit card rates have jumped from under 15% to the 21%-plus average seen today.
Again, these could see slight drops in the coming months, as the possibility of a Fed rate cut becomes stronger, Berkel says, but only small ones.
“I expect rates to stay steady or maybe creep lower as the Federal Reserve continues to telegraph its preference to lower rates at some point,” he says.
What to expect for rates moving forward
This week's decision is likely disappointing for those itching for lower mortgage rates or more affordable borrowing options. But it may not last for much longer.
“In line with the market and most economists, I expect the Fed will wait to get further good inflation data, and then take action to cut rates in their upcoming September meeting,” Cook says.
In the run-up to the Fed's July meeting, the CME Group FedWatch Tool, which uses investment activity to predict future fed moves, indicated a 100% probability that policy makers will decrease the federal funds rate at their September meeting
“While there is a lot of economic data to be released between now and the Federal Open Market Committee meeting in September, the current outlook strongly suggests a move then,” says David Johnston, managing partner of Amwell Ridge Wealth Management. “But don't bank on it.”
If a rate cut does happen, it doesn't necessarily mean that rates on mortgages or other products are going to plummet. As Cook explains, “Consumers should plan on rates remaining around their current levels for the near term with gradual declines later this year and into 2025.”
Currently, Fannie Mae projects 30-year mortgage rates will end 2024 at about 6.7% and then fall to 6.2% by the close of 2025. The Mortgage Bankers Association shows similar projections with 6.6% and 6.0% rates, respectively.
Shop around
No matter what financial products you're planning to use in the coming month, shopping around for your bank is critical to minimizing (or maximizing) your rate.
On mortgage loans, for instance, Freddie Mac estimates that getting at least four quotes can save you as much $1,200 per year in interest.
And on savings accounts and CDs, it could mean significantly more in interest earned. With a $10,000 deposit, an account with the current national average of 0.45% would net you just $45 annually. At Poppy Bank's 5.5% rate, you'd get $564 for that same time period - over 12 times more.
Meet the contributor
Aly J. Yale
Aly J. Yale is a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.
