NEW YORK (AP) Consumer and commercial debt, savings, auto loans, mortgages, and other types of borrowing will probably be impacted by the Federal Reserve’s third interest rate drop of the year.
The Fed said Wednesday that it is likely to lower rates more gradually in 2025 than it had predicted three months ago, however, because inflation pressures are still high and because of worries that President-elect Donald Trump’s policies will increase inflation. Instead of predicting four rate cuts in September, officials now only see two next year.
Borrowers who were looking for loans with significantly lower interest rates may be let down as a result. If the Fed continues to drop its benchmark short-term rate just twice next year, loan rates might hardly move.
According to Jacob Channel, senior economist at LendingTree, this cut might be the last one for some time. The Fed may decide to take a wait-and-see stance and keep rates unchanged at their January meeting since the actions of the incoming Trump administration could lead to a spike in inflation or otherwise upset the equilibrium of the economy.
The Fed may postpone further cuts until March or later, depending on the particular policies the Trump administration is able to implement.
Here’s what you should know:
According to Matt Schulz, chief credit analyst at LendingTree, while another rate cut is good news at the end of a hectic year, it doesn’t really mean much for people who have debt. You might save a dollar or two on your monthly debt payment with a quarter-point cut. It doesn’t alter the reality that, in 2025, taking matters into their own hands in regards to exorbitant interest rates is the best course of action for cardholders.
LendingTree reports that the average annual percentage rate on a new credit card offer is 24.43%. It was 24.92% in September. According to Schulz, there may be more slight drops in that rate over the coming months.
However, he issued a warning: Anyone hoping that the Fed can suddenly turn bad card rates into fantastic ones will be deeply let down.
“It’s a drop in the bucket for anyone feeling pressured by high rates, especially for credit card users who carry debt from month to month,” said Elizabeth Renter, senior economist at NerdWallet.
Alongside the Fed’s rate reduction, savers have seen a decline in returns on high-yield accounts. Therefore, even though these accounts aren’t as appealing as they once were, if you haven’t lately shopped for one, it can still be worthwhile to look into them. Several of these accounts have dividends that are close to 5%.
“Yes,” Schulz responded, “you have missed the peak rates that were observed a few months ago.” They’re probably still greater than what you’ll find from a regular bank, though, even at these levels.
The Fed influences mortgage rates even though it doesn’t set them. Rates for long-term mortgages often follow the yield on the 10-year Treasury note, which is influenced by the Fed’s benchmark rate and the market’s expectations for inflation.
Therefore, even if they don’t move in tandem, reductions in the Fed’s benchmark rate can, at least indirectly, drive down mortgage rates.
As an example, Channel stated that during the past month, mortgage rates have fluctuated up and down due to the turbulence in the bond market. The average rate on a 30-year fixed-rate mortgage has dropped to 6.60% from its peak of 6.84% for the week ending Nov. 21.
Even with this drop, the average is still far higher than the late September 2024 low of 6.08%.
Unless they refinance or sell and relocate, consumers with fixed mortgages will not see a change in their interest rate.
Ivan Drury, director of analytics for Edmunds.com, stated that on average, auto loans dropped from a peak of 7.3% in July to 6.8% last month as a result of the Fed’s half-point rate cut in September and its quarter-point rate cut in November.
He said that more people could now afford new cars thanks to the half-point cut, which fueled a November shopping frenzy. But the higher demand also drove average prices and monthly payments to all-time highs, which Drury generally ascribed to some optimism surrounding Trump’s election.
He claimed that while some people are more frugal with their spending, optimism and having the funds to do these things have undoubtedly encouraged some people’s spending.
According to Edmunds research, the average monthly payment for a car buyer increased to $753, and the average amount borrowed increased to $42,160.
From just under 16 million cars sold this year to 16.2 million in 2025, Edmunds anticipates only a slight uptick in auto sales the following year.
Renter of NerdWallet stated, “The Federal Open Market Committee is in a balancing act: cut (rates) too much and risk a resurgence of inflation; cut too little and continue to squeeze the labor market.”
In order to defend a possible rate decrease skip at the January meeting, Fed Chair Jerome Powell may be repeating the well-known analogy of going slowly in a dark room full of obstacles, according to Gregory Daco, chief economist for EY.
According to Daco, this will support a progressive relaxation of policy in order to monitor the behavior of the economy and inflation, indicating a highly data-dependent strategy.
Keep in mind that the Fed is set up to change course somewhat fast in the event of an unforeseen circumstance, Channel stated. Over the following 12 months, we may see larger and more frequent cuts if the economy begins to deteriorate significantly.
However, he issued a warning that rate cuts might be removed if inflation resurfaces and surges again.
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Tom Krisher, a Detroit-based AP Auto Writer, contributed to this story.
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