The upcoming meeting of the Federal Reserve has generated widespread anticipation that it will announce a reduction in its benchmark interest rate. This expectation comes despite recent inflation data that was higher than analysts had anticipated. Current market predictions suggest a remarkable 96% likelihood of a 25 basis-point rate cut this month, as indicated by the CME Fedwatch tool.
Mark Hamrick, Bankrate’s senior economic analyst, noted in an email that the prevailing sentiment is that the Fed is leaning towards cutting rates due to growing concerns about the economy and the job market. For many Americans facing the burden of elevated interest charges, a rate cut could provide much-needed relief. The federal funds rate, which influences overnight borrowing between banks, indirectly impacts consumer interest rates ranging from credit cards to auto loans.
Experts outline several key steps consumers might consider following a potential rate cut:
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Pay Down High-Interest Debt: While a rate cut could provide some relief to borrowers, it may not significantly impact already high credit card interest rates. Matt Schulz, LendingTree’s chief credit analyst, indicated that existing credit card rates might only decrease marginally. Therefore, consumers with high-interest debt should prioritize paying it down now by considering options like zero-interest balance transfer credit cards or personal loans to consolidate and reduce high-interest debt.
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Maximize Savings: With the prospect of lower rates for savings accounts and CDs, experts advise consumers to optimize their savings now. Many high-yield savings accounts currently offer rates exceeding 4%, significantly above the national average. Swati Bhatia, head of retail banking at Santander Bank, highlighted that even with a potential rate cut, consumers could still benefit from competitive rates if they lock in higher interest via CDs or high-yield accounts.
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Consider Housing Market Moves: The housing market is anticipated to gain momentum from lowered rates, potentially encouraging homeowners to sell properties they’ve held onto due to lower-rate mortgages taken out in previous years. Johnny Hummel from U.S. Bank observed that mortgage rates, which are closely tied to Treasury yields, have already receded from over 7% earlier in the year to just under 6.3%. An increase in transaction activity could lead to a healthier housing inventory.
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Improve Credit Scores: Lastly, improving one’s credit score remains a crucial factor for securing favorable loan terms. Tommy Lee, FICO’s senior director of scores and predictive analytics, emphasized the importance of on-time bill payments and maintaining low credit utilization. Regularly reviewing credit reports for errors can also help, as correcting any mistakes can substantially boost credit scores.
As the possibility of a rate cut looms, consumers are encouraged to take proactive steps that may position them to benefit from any favorable changes in the interest rate environment. Understanding their debt, savings options, and credit scores can create a more advantageous financial landscape, regardless of the Fed’s decisions.
