NEW YORK — The Federal Reserve’s decision to implement its third interest rate cut of the year will have significant repercussions on various forms of borrowing, including debt, auto loans, mortgages, and savings. Despite existing pressures surrounding inflation and concerns regarding the potential impact of President-elect Donald Trump’s policies on inflation rates, the Fed announced on Wednesday that it plans to adopt a more cautious approach to rate cuts in the upcoming year. Currently, the Fed envisions only two rate cuts for 2025, a reduction from the previously anticipated four cuts discussed in September.
As a result, individuals who have been anticipating more substantial decreases in loan interest rates may find themselves disappointed, as the Fed’s plan suggests that rates may not fluctuate significantly if it proceeds with its proposed schedule of two cuts.
According to Jacob Channel, a senior economist at LendingTree, this could very well be the last rate reduction for some time. Channel pointed out that the impending policies of the Trump administration could potentially trigger a spike in inflation or destabilize the economy, prompting the Fed to adopt a “wait-and-see” approach regarding future rate adjustments, particularly as the January meeting approaches.
Depending on how the Trump administration’s policy proposals unfold, the Fed may delay further cuts until March or beyond. In terms of practical implications for consumers, a measured approach to rate reductions will have limited effects on individuals struggling with credit card debt.
Chief credit analyst at LendingTree, Matt Schulz, remarked that while a rate decrease is a positive note at the conclusion of a tumultuous year, it ultimately offers minimal benefit for those with existing debt. He indicated that a quarter-point cut might only reduce monthly payments by a dollar or two, emphasizing that the best strategy for cardholders looking to navigate high interest rates remains to actively manage their debt in 2025.
Current averages reveal that the annual percentage rate on new credit card offers hovers around 24.43%, slightly down from 24.92% in September. Schulz suggests that minor declines may occur in the coming months but cautions against expecting drastic improvements from the Fed’s actions.
For savers, high-yield savings accounts still present a viable option, although the returns have diminished alongside the Fed’s rate cuts. Rates are no longer at their peak, yet some accounts continue to yield returns near 5%. Schulz notes that while savers may have missed out on the highest rates observed earlier, current offerings tend to surpass traditional bank rates.
As for mortgage rates, while the Fed does not directly set these rates, it wields influence over them. Long-term mortgage rates typically move in accordance with the yield on the 10-year Treasury note, which is partly determined by inflation expectations and changes in the Fed’s key rates. Thus, reductions to the Fed’s primary rate could indirectly exert downward pressure on mortgage rates.
Recent fluctuations in the bond market have led to varying mortgage rates, with the 30-year fixed-rate mortgage average falling from a recent peak of 6.84% to 6.60%. However, this figure is still considerably higher than the 2024 low of 6.08% recorded in late September. Borrowers with fixed mortgages will maintain their current rates unless they opt to refinance or relocate.
The auto loan landscape has reflected the effects of recent Fed rate cuts. Average auto loan rates decreased from peaks of 7.3% in July to approximately 6.8% last month, thereby making vehicles more affordable and contributing to a spike in sales, as indicated by Ivan Drury of Edmunds.com. Despite the encouraging sales figures linked to consumer optimism following the election, the surge in demand has also led to increased average prices and record-high monthly payments for new vehicles.
Looking ahead, Edmunds forecasts a modest increase in auto sales, with expectations of 16.2 million vehicles sold next year compared to just under 16 million this year. Overall, the Fed continues to monitor inflation levels alongside employment rates, navigating a complex balancing act between the risk of inflation resurgence and the potential impact on the labor market.
Gregory Daco, chief economist for EY, suggests that Fed Chair Jerome Powell is emphasizing a cautious approach, akin to moving slowly in a dimly lit room, to justify the potential for a rate-cut delay during the upcoming January meeting. The Federal Open Market Committee’s stance appears to be data-driven, meaning that unexpected economic shifts could prompt quick adjustments to the rate strategy.
Channel dismisses the idea of a gradual approach being guaranteed, reminding that the Fed can pivot rapidly should any adverse conditions arise. Should the economy exhibit troubling signs or if inflation reemerges prominently, the potential for more substantial cuts may come back into play.