Miki Bowman, a prominent hawk on the FOMC, stated: “I don’t feel assured that inflation will decrease in the same manner as it did in the latter half of the past year.”
She suggested the possibility of a rate reduction: “If the incoming data continues to indicate that inflation is shifting…
— Nick Timiraos (@NickTimiraos) August 10, 2024
The Federal Reserve might initiate its first interest rate cut in four years as soon as September. Such a decision could have profound implications for consumers, though the advantages may not extend to everyone. Reduced deposit yields and better credit card conditions are among the expected impacts of the projected rate drop.
U.S. Banks Confronting $517 Billion in Unrealized Losses 🚨 – no one is more eager for interest rate reductions than they are pic.twitter.com/NOt77O7Uen
— Barchart (@Barchart) August 11, 2024
Jim Triggs, the president and CEO of Money Management International, warns that the positive effects may depend on how swiftly banks can pass the lower rates on to consumers. Those with weak credit scores may find it challenging to benefit from refinancing options that typically come with reduced rates. Since March 2020, at the onset of the COVID-19 pandemic, the Fed has refrained from changing rates.
Since then, rates have been raised by a cumulative 5.25 percentage points to combat inflation. Recent economic signals indicate a cooling trend in the economy, raising the chances of forthcoming rate reductions.
Many individuals are rooting for Fed cuts, but it ultimately depends on whether we face a recession. If not, stocks might soar, but should a recession occur, brace for impact. pic.twitter.com/wgeZdGPAxU
— Barchart (@Barchart) August 9, 2024
The Federal Reserve primarily impacts short-term lending rates and does not directly influence long-term rates such as those for 30-year fixed mortgages, which generally align with 10-year Treasury yields.
While mortgage rates have seen an increase due to inflation worries, they have begun to ease and may decline further if the economic slowdown persists. Jack Ablin from Cresset Capital Management mentioned that existing home sales have fallen to their lowest point since 2010.
Analysis of the Fed’s Rate Cut Impact
Decreased mortgage rates could stimulate home sales, enhancing accessibility to homeownership. Conversely, lower rates might pose challenges for savers. Greg McBride, the chief financial analyst at Bankrate, advises consumers to secure current yields on certificates of deposit, as they are likely to diminish with an upcoming rate reduction.
Presently, yields on leading five-year CDs are under 4.5%, having dropped from a high of 4.85% last October. One-year CD yields have similarly declined to around or below 5%, down from 5.75% in December. Those burdened with significant debt may find that rate cuts alone do not provide enough relief to lower monthly payments.
Substantial financial intervention might still be needed for considerable debt loads. Additionally, consumers with low credit ratings may struggle to secure new loans or refinance existing ones. Despite a relatively low unemployment rate of 4.3%, many consumers encounter financial difficulties.
Money Management International has reported a remarkable 52% rise in new credit-counseling clients in the first half of 2024 compared to the previous year, with an average unsecured debt amounting to $28,000. Triggs emphasizes that a holistic approach—encompassing debt-management plans, budgeting, prioritized debt-repayment techniques, and financial education—is often essential for enduring fiscal wellness.
