September 2019 Fed Rate Cut Probability & Analysis
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%, the Fed is poised to reduce rates for the second 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 conducted a nationally representative survey and assembled some relevant research. You can find the results below.
There is a 91% chance of the Fed reducing its target interest rate by 25 basis points in September 2019.
75% of people say the Federal Reserve should drop interest rates this month.
70% of people say the Federal Reserve knows how to grow the economy better than President Trump.
67% of people agree with President Trump that it’s time for the Fed to drop rates.
41% of people say they will be more confident in the economy if the Fed cuts rates.
56% of people say it’s good for the economy when the Federal Reserve cuts interest rates.
72% of people say it’s good for their own wallet when the Federal Reserve cuts interest rates.
68% of people say the interest rates on their loans are currently too high.
74% of people say their credit card interest rates are currently too high.
The 25% of people who say credit cards become less expensive after a Fed rate cut are correct. Things aren’t as clear-cut for the 45% who think mortgages do, however.
The Federal Reserve has increased its target rate nine times since December 2015, with only one decrease, in July 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 a September 2019 rate cut to influence us.
The vast majority of credit card rates are variable, tied to the Prime Rate. As a result, we expect to see credit card rates decrease about the same amount as the Fed’s target.
- A 25-basis point cut will save credit card users roughly $1.6 billion in extra finance charges during 2019.
- 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 $1.5 billion due to the 25-basis point cut in July.
If recent rate hikes are any indication, we won’t see much of a change following a September 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.
- The Fed has cost the average homebuyer ($230,984 loan) more than $38,000 since the start of 2015, if you assume the 80-basis point rise in the average APR on a 30-year fixed-rate mortgage from January 2015 to January 2019 is due solely to the nine Fed rate hikes that occurred during that timeframe.
- WalletHub expects the average APR on a 48-month new car loan to fall by around 15 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 5.35% in May 2019 (the most recent data available). That’s a 135-basis point increase in a period characterized by 225 basis points in Fed rate hikes, plus record auto sales.
- 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 95 basis points since September 2015 (225 basis points in Fed hikes since then). As a result, we expect online savings account yields to drop the most after a Fed rate cut – around 11 basis points.
Interest Rate Change by Account Type (Q3 2015 to Q2 2019)
*The above graph reflects the average rate for new offers in each category, with the Federal Reserve’s target rate serving as a benchmark.
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