Fed Cuts Interest Rates For Third Time: What It Means For You

For the third time in a row, the Fed reduced its benchmark federal funds rate by 25 basis points on Dec. 18, 2024. The previous range of 4.50% to 4.75% was followed by a decline in the Fed's benchmark rate from 4.25% to 4.50%.

The December rate cut follows September and November's 50 basis point and 25 basis point rate cuts, respectively. The Fed had adapted reformed strategies to bolster the economy when the federal funds rate dropped by a whole percentage point.

The Fed made some adjustments to tackle inflation rates and boost economic demand. To achieve the objective, they projected only two rate cuts in 2025, down from the previously expected four. The number of rate cuts for 2026 has also been reduced from four to two.

Consumers who have been drowning under the crushing weight of exorbitant borrowing expenses finally have hope. Although long overdue, the Federal Reserve's decision to curtail its aggressive rate-hiking rampage is a welcome relief.

The recent rate cut is testament to two facts -- growing economic confidence and inflation moderation. Although this action may lower borrowing costs, there are doubts around how it would affect mortgage interest rates.

A rate cut does not ensure a comparable decrease in mortgage rates because of the intricate link between Fed policy and mortgage rates. Homebuyers and homeowners in particular should exercise caution and keep a careful eye on the situation, CBS reported.

Impact Of The Fed's December Rate Cut On The General Population:

Credit cards:

The Fed's rate hikes caused the average U.S. credit card interest rate to soar from 16.34% in March 2022 to over 20%, almost reaching an all-time high. Credit card consumers have not benefited much from recent rate decreases, which have only marginally lowered rates.

Auto-loans:

With average rates of 9.01% for new cars and 13.76% for used cars, auto loan rates are still high. According to a 2023 LendingTree analysis cited by CNBC, comparing rates for these fixed-rate loans can result in an average savings of nearly $5,000.

Mortgage rates:

There is no direct correlation between the Fed's interest rate choices and mortgage rates, especially 15- and 30-year fixed rates. Rather, they are impacted by the overall state of the economy and Treasury yields. Mortgage rates have consequently gone up, with the average 30-year fixed rate now standing at 6.75%.

The fixed-rate mortgages will only be applicable to those who refinance or buy a new home. However, new homebuyers can still save money owing to slightly lower mortgage rates. For example, a $350,000 mortgage at 6.6% would save $56/month compared to November's rate of 6.84%.

Student loans:

Private loans with variable rates may see rate reductions, saving borrowers between $1 and $1.25 per month, but federal student loan rates are set and provide little relief from rate reductions.

Savings rate:

Top-yielding online savings accounts continue to offer up to 5% interest, surpassing inflation, even after the Fed lowered interest rates. High-yield savings accounts continue to be appealing, while one-year CDs offer between 1.74% and 4.5%.

The Fed's interest rate cuts only partially affect mortgage rates. Several other important economic aspects are also at play, CBS reports. The factors include unemployment, inflation, and the yield on the 10-year Treasury. Accordingly, homebuyers should take into account the overall state of the economy when assessing their financing options, even though a Fed rate cut may help lower mortgage rates.

Although the Fed's most recent rate drop is good for consumers, the many dynamics affecting mortgage rates may limit its influence. CBS suggests that borrowers should concentrate on their financial circumstances and objectives rather than trying to time the market. They should also be ready to take advantage of opportunities when they present themselves.