Introduction

At O1ne Mortgage, we prioritize educating our clients about consumer credit and finance. With the Federal Reserve’s projected rate reductions in 2024, it’s crucial to understand how these changes can affect your borrowing and savings. This article will provide you with a comprehensive overview of what to expect and how to make the best financial decisions during this period.

What Are the Interest Rate Reduction Projections?

The Federal Open Market Committee (FOMC) raised the federal funds rate 11 times between March 2022 and July 2023. Since then, the rate has been steady at a range of 5.25% to 5.5%. In December 2023, the committee indicated that they expected to cut the rate three times in 2024, for a total reduction of 0.75%. Further cuts are projected for 2025 and 2026, potentially bringing the rate into the 2% to 2.25% range.

These projections are not set in stone, as the FOMC’s decisions will depend on how quickly the inflation rate cools to their target of 2%. The core personal consumption expenditures index, which excludes volatile food and energy prices, showed an annual inflation rate of 2.9% in December 2023.

How Fed Rate Reductions Impact Borrowing

Banks use the federal funds rate to determine how much to charge other banks when lending money to meet overnight reserve requirements. This rate directly influences the prime rate, which banks and other lenders use to determine interest rates for various loans, including both installment loans and revolving lines of credit.

Installment Loans

For both fixed- and variable-rate loans, the prime rate helps determine the loan’s starting interest rate. If you plan on taking out a personal loan, auto loan, student loan, or home equity loan, waiting for Fed rate reductions could save you money. With a fixed-rate loan, further rate reductions won’t impact you because your interest rate is fixed for the life of the loan. However, you could potentially refinance the loan at a lower rate.

If you have a loan with a variable interest rate, such as a student loan or adjustable-rate mortgage loan, your interest rate changes regularly based on market conditions. As a result, you’ll likely benefit from each rate reduction with a corresponding decrease in your loan’s interest rate.

Revolving Lines of Credit

If you have a credit card or a home equity line of credit (HELOC), your interest rate is likely variable, which means that both new and existing accounts will likely see interest rates go down along with reductions in the fed rate.

How Fed Rate Reductions Impact Savings

Banks use customer deposits to fund their loans, and because banks and other lenders are earning more from higher loan interest rates, they may also offer higher interest rates on savings products to encourage more deposits. However, each financial institution has a different process for determining its savings rates, so the impact of rate reductions will depend on your bank and the type of account.

Traditional Savings Account

Banks that offer traditional savings accounts typically don’t offer much higher rates when the fed rate is high. As a result, your rate likely won’t go down by much as the FOMC starts cutting rates.

High-Yield Savings Accounts

Banks that offer high-yield savings accounts offer annual percentage yields (APYs) that are much higher than what you can get with a traditional savings account. For context, the national average savings rate is 0.47% in February 2024, according to the Federal Deposit Insurance Corp. (FDIC). However, some of the best high-yield savings accounts are offering APYs exceeding 4% and even 5%. Because these accounts offer variable rates, you’ll likely start to see your APY decline once the FOMC begins cutting its rate.

Certificates of Deposit

Certificates of deposit (CDs) offer a fixed interest rate instead of a variable one, which means that your APY will remain the same for your chosen term, which can range from one month to several years. Once the FOMC starts cutting its rate, you can expect APYs for new CDs to start declining. However, if you open a CD before the first rate cut, your fixed rate won’t be impacted—though you can likely expect a lower rate when it’s time to renew the account at the end of your term.

How to Minimize the Negative Impact of Fed Rate Reductions

If you have some flexibility with your financial plan, there are some steps you can take to enjoy the benefits of fed rate reductions while also minimizing the drawbacks. Options include:

• Hold off on borrowing until interest rates start to decline.
• Look into refinancing existing fixed-rate loans at a lower interest rate.
• Switch to a high-yield savings account to take advantage of higher APYs while you can.
• Consider putting some money in a CD to enjoy a high fixed APY for longer.

The Bottom Line

Keep in mind that, while economic conditions can influence loan and credit card interest rates, your creditworthiness also has a major impact on your ability to get favorable credit terms. Check your credit score and credit report to evaluate your overall credit health, and consider whether you can take steps to improve your credit score before applying for a loan or credit card.

At O1ne Mortgage, we are here to help you navigate these changes and make the best financial decisions. For any mortgage service needs, call us at 213-732-3074. Our team of experts is ready to assist you in finding the best loan options tailored to your needs.