What a Federal Reserve rate cut means for your finances

NEW YORK AP The Federal Reserve cut its benchmark interest rate by a quarter point Wednesday for the second time since September Before that it had gone nine months without a cut The federal funds rate is the rate at which banks borrow and lend to one another While the rates consumers pay to borrow money aren t directly linked to this rate shifts affect what you pay for credit cards auto loans mortgages and other financial products While the full economic impact of such a move will unfold over time early indicators suggest that even modest rate cuts can have meaningful consequences for consumer behavior and financial medical noted Michele Raneri vice president and head of U S research at credit reporting agency TransUnion The Fed has two goals when it sets the rate one to manage prices for goods and services and two to encourage full employment Typically the Fed might increase the rate to try to bring down inflation and decrease it to encourage faster economic rise and increase hiring The challenge now is that inflation is higher than the Fed s target but the job sphere has been weak The cabinet shutdown has also prevented the collection and release of input the Fed relies on to monitor the fitness of the market Still the Fed has projected it will cut rates once more before the end of the year Here s what to know Interest on savings accounts won t be as appealing For savers falling interest rates will slowly erode attractive yields presently on offer with certificates of deposit CDs and high-yield savings accounts Three of the top five high yield savings accounts had rate cuts after the last Fed rate cut in September according to Ken Tumin founder of DepositAccounts com while two of the big five banks Ally and Discover Capital One cut their savings account rates The top rates for high yield savings account right now remain around to Those are still better than the trends of latest years and a good option for consumers who want to earn a return on money they may want to access in the near-term A high yield savings account generally has a much higher annual percentage yield than a traditional savings account The national average for traditional savings accounts is right now according to Bankrate There may be a limited accounts with returns of about through the end of according to Tumin but the Fed cuts will filter down to these offerings lowering the average yields as they do A cut will impact mortgages gradually For prospective homebuyers the field has already priced in the rate cut Mortgage rates in particular have responded swiftly commented Raneri Just in the past week they fell to their lowest level in over a year While mortgage rates don t dependably move in lockstep with the Fed s target rate often pricing in anticipated future cuts the continued easing of monetary initiative may well push rates even lower Bankrate financial analyst Stephen Kates declared a declining interest rate habitat will provide specific relief for borrowers over time Whether it s a homeowner with a mortgage or a current graduate hoping to refinance aspirant loans and credit card debt lower rates can ease the burden on multiple indebted households by opening opportunities to refinance or consolidate he mentioned Auto loans are not expected to decline soon Americans have faced steeper auto loan rates over the last three years after the Fed raised its benchmark interest rate starting in early Those are not expected to decline anytime soon While a cut will contribute to eventual relief it might be slow in arriving analysts say If the auto field starts to freeze up and people aren t buying cars then we may see lending margins start to shrink but auto loan rates don t move in lockstep with the Fed rate Kates announced Prices for new cars remain at historically high levels not adjusting for inflation Generally speaking an auto loan annual percentage rate can run from about to Bankrate s preponderance new weekly survey revealed that average auto loan interest rates are presently at on a -month new car loan Credit card rate relief could be slow Interest rates for credit cards are in the present at an average of and the Fed s rate cut may be slow to be felt by anyone carrying a large amount of credit card debt That mentioned any reduction is positive news While inflation continues to exert pressure on household budgets rate cuts offer a likely counterbalance by lowering debt servicing costs Raneri announced Still the best thing for anyone carrying a large credit card balance is to prioritize paying down high-interest-rate debt and to seek to transfer any amounts feasible to lower APR cards or negotiate directly with credit card companies for accommodation The Associated Press receives encouragement from the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy The independent foundation is separate from Charles Schwab and Co Inc The AP is solely responsible for its journalism Source