1. The Federal Reserve and Your Finances

There are a lot of stories about potential Federal Reserve rate cuts, which raises questions about the impact on rates for mortgages, car loans, and credit card balances. Will a rate cut decrease your payments right away? And which payments? It depends, because the Federal Reserve only directly controls some rates.  Others are only indirectly influenced by Federal Reserve actions.

What the Federal Reserve actually controls:

When the Federal Reserve cuts or raises rates, it only directly impacts two rates: the rates that banks pay to borrow money from the Federal Reserve, and the rates to borrow from other banks overnight (yes, banks sometimes borrow for just one night).

What consumer rates are impacted by Federal Reserve moves:

·      Credit cards and HELOCs: Most credit cards and home equity lines of credit (HELOCs) are tied to the prime rate, which moves almost in lockstep with Federal Reserve rate changes. If the Federal Reserve cuts, your variable-rate card or line of credit will usually drop within a month or two.

·      Auto loans and personal loans: These rates are set by lenders based on competition and funding costs, but they’re sensitive to Federal Reserve rate changes. An interest rate cut makes borrowing cheaper for lenders and some of that savings gets passed to consumers in lower rates.

·      Adjustable-rate mortgages (ARMs): If your mortgage rate adjusts based on a short-term index, your payment may decline after a Federal Reserve cut, though timing depends on your reset schedule.

What are the rates the Federal Reserve doesn’t directly impact:

·      30-year fixed mortgage rates: Long-term mortgage rates are impacted primarily by long-term bond rates, especially the 10-year Treasury bond. Federal Reserve cuts don’t impact long-term bond rates. A cut will often signal slower economic growth ahead and that could push long-term rates down, but it’s not automatic. If bond investors think a rate cut will fuel inflation or that the Federal government will increase its debt issuance, long-term rates could even rise.

·      Student loans: Federal student loan rates are set annually by Congress, not by the Federal Reserve. But variable-rate private loans might see lower rates when the Federal Reserve cuts rates, similar to credit cards and auto loans.

The Big Picture:

Federal Reserve cuts = cheaper short-term borrowing, for credit cards, auto loans, and some home equity lines.

Long-term rates are shaped more by the bond market’s expectations for future growth, inflation, and additional federal government debt on the horizon.

So if you have credit card debt or a HELOC, you’ll likely see quick relief. But if you’re shopping for a long-term fixed mortgage or refinance, the impact depends on what bond investors do in the long-term bond market.

Why this matters to you:

Understanding what the Federal Reserve does and doesn’t control can help you make smarter borrowing decisions. For example:

·      Consider refinancing variable debt when rates fall.

·      Don’t assume mortgage rates will fall just because the Federal Reserve cuts their short-term rates.

And keep in mind that rate cuts are often due to slowing economic growth, so think carefully about your own job security and cash flow before taking on new debt.