This archive report was first published on 31 July 2019.
On July 31, 2019, the Federal Reserve announced a quarter-point interest-rate cut, its first in a decade, affecting the federal funds rate, which banks and other financial institutions charge each other for short-term borrowing.
While most consumers don't engage in overnight borrowing, the Fed's move still impacts the borrowing and saving rates they encounter daily. The effect may not be direct or immediate, but there's evidence that the mere expectation of a rate cut had already pushed down some key rates consumers pay.
The Fed's cut may prevent a recession, potentially heading off economic damage that could hurt workers and consumers. If the move works, it could give the economy a little extra boost, reducing the risk of millions of Americans being thrown out of work.
Impact on Savings Accounts ¶
When the Fed held rates near zero after the 2008 financial crisis, there was little incentive to save money with a bank. However, since 2015, Fed officials have raised rates nine times, lifting savers but not by much. The average yield on a one-year certificate of deposit briefly cracked 1 percent this year but has since fallen.
Savers looking for higher returns might consider online savings accounts, which often pay yields of 2 to 2.5 percent. Some accounts require a minimum balance, but that can be as low as $1.
Impact on Mortgages ¶
Homebuyers who borrowed money late last year were unlucky, with the average 30-year mortgage rate nearly 5 percent. It has since fallen to 3.75 percent, tied to expectations of a rate cut. The slide is probably fully priced in, unless the Fed hints at more rate cuts.
Historically, mortgage rates have not fallen much farther, with the average 30-year rate never dipping below 3.3 percent.
Impact on Borrowing and Spending ¶
One interest rate that has risen significantly is the average interest rate on credit-card debt, now nearly 18 percent. Unlike savings yields and mortgage rates, it has not fallen in recent months, meaning you shouldn't expect it to fall immediately after the rate cut.
Car loan rates have risen since 2016 but fell back slightly this year. The rate on the average five-year loan for a new car is now just under 4.75 percent, according to Bankrate.com.
Most economists don't expect a single Fed rate cut to change consumers' spending habits, as the impact on the household budget is inconsequential.
Impact on Employment ¶
By reducing rates, policymakers are trying to reduce the risk of millions of Americans being thrown out of work. They are attempting to ward off the prospect of a job-killing recession by giving the economy a little extra boost.
