After a string of nine interest-rate increases that took the Federal Reserve’s target rate from near zero in December 2015 up to a range of 2.25% - 2.5% in December 2018, the Fed is now poised to reduce rates for the third time since the Great Recession. Exactly what impact such a move will have on consumers’ wallets and the economy more broadly remains to be seen. But the hope is that lower rates will prolong what is already the longest economic expansion on record. At the very least, we can expect people with credit card debt to save hundreds of millions of dollars on interest.
To help shed some light on what we can expect from interest rates in the near future and how Americans feel about the prospect of a Fed rate cut, WalletHub analyzed historical data and conducted a nationally representative survey of more than 550 people on October 26.
There is a 96% chance of the Fed reducing its target interest rate by 25 basis points in October 2019.
Federal Reserve interest rate hikes have historically impacted new originations more than rate cuts.
Federal Reserve rate changes do not affect the interest rates that deposit accounts pay.
40% of people say they will be more confident in the economy if the Fed cuts rates.
The Federal Reserve has increased its target rate nine times since December 2015, with two decreases in 2019.
Fed Rate Cut Impact by Loan Type
Interest rates on financial products, from credit cards to car loans and mortgages, are generally based on some sort of benchmark rate, which in turn is influenced by the Federal Reserve’s target interest rate in one way or another. So when the Fed’s target rises or falls, the interest rates consumers pay, and the overall cost of borrowing do too. The rates we earn on deposit accounts aren’t nearly as quick to react.
Below, you can see how much we can expect an October 2019 rate cut to influence us.
The vast majority of credit card rates are variable, tied to the Prime Rate. However, issuers have ways to compensate for decreases in this index rate. As a result, we expect to see credit card rates decrease by about 4 basis points for every 25-basis point cut in the Fed’s target.
- A 25-basis point cut will save existing credit card users roughly $1.6 billion in extra finance charges over the next 12 months. The change will not affect new originations much, as credit card companies seem to neutralize Fed rate cuts with increases of their own for new accounts.
- Due to the nine Federal Reserve rate hikes from Dec. 2015 to Dec. 2018, credit card users were set to pay roughly $13 billion more in interest during 2019 than they would have otherwise. That amount has been offset by roughly $3.2 billion due to the 50 basis points in cuts thus far in 2019: 25 basis points in July followed by another 25 points in September.
If recent rate hikes are any indication, we won’t see much of a change following an October rate cut, as the mortgage markets have already accounted for the move. Mortgages have fixed rates that are priced with a far longer timeframe in mind than other borrowing vehicles.
However, that is not to say Fed rate changes don’t make mortgages more or less expensive for new borrowers. WalletHub’s analysts estimate that this rate cut has already decreased the cost of new mortgages by around 10 basis points.
- WalletHub expects the average APR on a 48-month new car loan to fall by around 4 basis points in the months following a 25-basis point rate cut by the Fed.
- The average APR on a 48-month new car loan rose from 4.00% in November 2015 to 5.27% in August 2019. That’s a 127-basis point increase in a period characterized by 225 basis points in Fed rate hikes followed by 50 basis points in Fed rate cuts, with record auto sales as a backdrop.
- WalletHub expects little, if any, change in the APYs available from most deposit accounts following the Fed’s rate cut. Yields did not rise much following rate hikes, and they’re already at quite low levels historically.
- Unlike branch-based accounts, online savings accounts did react to previous Fed rate hikes, with yields increasing by an average of 83 basis points between December 2015 and December 2018 (225 basis points in Fed hikes during that period). Rates have not dropped quite as fast in response to recent Fed rate cuts, however, so we expect online savings account yields to drop by around 8 basis points after the next rate cut.