The Federal Reserve is scheduled to lower interest rates this week. What does that mean, and how might it affect your spending decisions?
When the Fed cuts interest rates, it usually means it’ll cost less to borrow money—whether you’re applying for a new credit card or taking out a mortgage.
However, interest rate cuts aren’t typically associated with a growing economy. As Ann Saphir at Reuters reminds us, the last time the Federal Reserve lowered interest rates was during “the depths of the financial crisis more than a decade ago.”
So why cut rates now? It’s unclear—and I don’t mean that it’s unclear to me. There’s no general consensus on why this rate cut is likely to take place, not even from the policymakers advocating on its behalf. The most likely conclusion is that it’s more about the global economy than the national economy, as Nick Timiraos of the Wall Street Journal explains:
Fed leaders see tighter linkages than in the past between the U.S. and global economies and think domestic rates can’t rise much higher above those in other advanced economies, which have much lower or even negative rates.
It’s also unclear what the rate cut might mean for the typical consumer. At the Washington Post, Heather Long notes that credit card interest rates are currently at a record high, and a rate cut might not change anything:
Credit card borrowers are currently paying a record high average interest rate of 17.76 percent, according to data compiled by CreditCards.com. In theory, that rate should decline as the Fed cuts the benchmark interest rate, but some analysts are skeptical that will occur because of reasons outside the central bank’s control.
Credit card companies have become adept at increasing fees and finding ways to keep rates higher than the Fed rate would suggest, says Ted Rossman, an industry analyst at CreditCards.com.
“People with credit card debt shouldn’t view a Fed rate cut as a free lunch. They could well pay for it in other ways,” said Rossman.
On the other hand, Long also notes that the average 30-year mortgage rate is currently at the lowest it’s been since 2016 (3.75 percent, if you’re curious). So it’s not all bad for borrowers—assuming you can afford to buy into today’s real estate market, of course.
The interest rate cut may also result in some stock market fluctuation, though the same thing could happen if the Feds don’t cut interest rates, as Shawn Langlois at MarketWatch reminds us.
[A selloff] could happen as soon as this week, if the Fed doesn’t deliver Wednesday a quarter-point cut.
Essentially, we’re all waiting to see what happens next. Until then—and even afterwards—continue to practice smart personal finance habits, like comparing interest rates before committing to a mortgage, using the buy-and-hold investment strategy, and avoiding credit-card debt.