Federal Reserve - 53c4r1t4-r3lat36

The Fed is set to cut rates for the first time in 4 years. What does that mean for your money?

admin — Tue, 17 Sep 2024 10:00:10 +0000

It’s been a long and bumpy road to the Federal Reserve’s first interest rate cut in more than four years — a moment that could prove decisive to the finances of millions of Americans.

On Wednesday, the Fed is expected to reduce its benchmark rate, which currently stands at its highest point in 23 years, after the central bank introduced a flurry of rate hikes to tame the pandemic’s high inflation. While economists are unanimous in expecting a rate cut on September 18, they’re split between predicting a 0.25 percentage point cut versus a 0.5 percentage point reduction, according to financial data firm FactSet.

Whatever the size of the cut, the Fed’s first rate reduction since March 2020 will provide some welcome relief for consumers who are in the market for a home or auto purchase, as well as for those carrying pricey credit card debt. The decision is also expected to kick off a series of rate reductions later this year and into 2025, which could have lasting implications on mortgage and auto loan rates, but could also have a downside of shaving the relatively high returns recently enjoyed by savers.

“It’s been a long marathon — the Fed feels it’s time to lower interest rates again,” Sara Rathner, co-host of the Smart Money podcast and a personal finance expert for NerdWallet, told CBS MoneyWatch. “Consumers are definitely feeling the pinch. It’s been this one-two punch of higher interest rates and inflation.”

Wednesday’s rate cut will “present an opportunity for consumers to take a look at their finances and save money on some of their borrowing,” she said.

When is the Fed’s September 2024 meeting?

The Fed’s September 2024 meeting will be held from September 17-18, with the central bank scheduled to announce its rate decision at 2 p.m. Eastern time on September 18.

That will be followed by a press conference with Fed Chair Jerome Powell at 2:30 p.m. E.T., where Powell will discuss the central bank’s economic outlook.

Powell has recently signaled the central bank is ready to reduce its benchmark rate, noting at an August speech that “the time has come” for the Fed to adjust its monetary policy after inflation dropped below 3% on an annual basis and amid some signs of weakness in the labor market.

What size of rate cut is expected?

That’s the big debate among economists, with some predicting that the Fed will shave its benchmark rate by 0.25 percentage points — the Fed’s standard reduction — while others are predicting a jumbo cut of 0.5 percentage points.

Regardless of the size, the rate cut will provide some relief to borrowers, albeit at a relatively small dose given that the current Fed funds’ target stands in a range of 5.25% to 5.5%. A reduction of 0.25 percentage points, for instance, would take the target range down to 5% to 5.25%, providing only a small reduction in borrowing costs.

“By itself, one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget,” noted Greg McBride, chief financial analyst at Bankrate, in an email. “What will be more significant is the cumulative effect of a series of interest rate cuts over time.”

Will the Fed cut rates later in 2024?

Yes, economists polled by FactSet are predicting rate cuts at the Fed’s November and December meetings —there is no October rate decision meeting. Additionally, many economists expect the Fed to continue to cut throughout 2025, with most forecasting that, by May 2025, the benchmark rate will stand between 3% to 3.5%, according to FactSet.

“Our baseline forecast is for three consecutive 25bp cuts in September, November and December, and an eventual terminal rate of 3.25%-3.5%,” Goldman Sachs analysts wrote in a September 15 research note.

How will the rate cut impact mortgage rates?

Mortgage rates have surged alongside the Fed’s hikes, with the 30-year fixed-rate loan topping 7% in 2023 as well as earlier this year. That placed homebuying out of financial reach for many would-be buyers, especially as home prices continue to climb.

Already, mortgage rates have slid ahead of the September 18 rate decision, partly due to anticipation of a cut as well as weaker economic data. The 30-year fixed-rate mortgage currently sits at about 6.29%, the lowest rate since February 2023, according to the Mortgage Bankers Association.

But the September 18 rate cut may not result in a significant additional drop in rates, especially if the economy remains relatively strong, Orphe Divounguy, senior economist at Zillow, told CBS MoneyWatch.

“We expect mortgage rates to end the year kind of roughly where they are now,” he said.

Even so, this could prove to be the right time for recently sidelined homebuyers to enter the market, Divounguy added. That’s because housing affordability is improving while inventory is scaling back up after a dip in 2022, providing buyers with more choices.

Some homeowners with mortgages of more than 7% may also want to consider refinancing into a lower rate, experts said. For instance, a homeowner with a $400,000 mortgage could save about $400 a month by refinancing into a loan at today’s rate of about 6.3% versus the peak of about 7.8% in 2023.

“Generally, lenders would recommend refinancing when it’s a difference of 1 percentage point or more,” noted Smart Money’s Rathner.

What about auto loans, credit cards and other debt?

Auto loan rates are likely to see reductions after the rate cut, experts said. And that could convince some consumers to start shopping around for a vehicle according to Edmunds, which found that about 6 in 10 car shoppers have held off on buying because of high rates.

Currently, the average APR on a loan for a new car is 7.1%, and 11.3% for a used car, according to Edmunds.

“A Fed rate cut wouldn’t necessarily drive all those consumers back into showrooms right away, but it would certainly help nudge holdout car buyers back into more of a spending mood, especially coupled with some of the advertising messages that automakers typically push during Black Friday and through the end of the year,” said Jessica Caldwell, Edmunds’ head of insights, in an email.

Likewise, credit card rates, which have been at historic highs, are likely to follow the rate cut, but this probably won’t make much of a difference for people carrying balances, said LendingTree credit analyst Matt Schulz. He calculates that someone with a $5,000 balance and a card with a 24.92% APR could save less than $1 a month on interest if their APR is reduced by one-quarter percentage point.

A better bet, experts say, is to pay down the debt, if possible, or look for a zero-percent balance transfer card or a personal loan, which typically carries a lower rate than credit cards.

How will a Fed cut impact savings accounts and CDs?

If rate hikes have a silver lining, it’s that savers have enjoyed high rates on certificate of deposits (CDs) and high-yield savings accounts. Some banks have offered APYs as high as 5%, giving Americans a chance to juice their savings accounts.

But that may be finally coming to a close, Schulz noted.

There’s still time for people to take advantage of relatively high rates, even if they slide slightly in the coming months, he added. “I don’t think anybody should expect rates to fall off a cliff immediately,” he said.

Still, some experts have predicted that the top savings accounts could see rates drop by as much as 0.75 percentage points after the Fed cuts rates. Even so, consumers can still benefit by moving money from a traditional savings account into a high-yield savings account, which can help them build up an emergency fund or bolster their savings with higher returns.

As for CDs, Schulz recommends people lock in rates now, if they can. “Rates are already starting to come down, and they’re only going to continue to come down,” he said.

.

Source link

The post The Fed is set to cut rates for the first time in 4 years. What does that mean for your money? first appeared on 53c4r1t4-r3lat36.

Fed seen nearly as likely to cut rates by 50 bps as 25 bps

admin — Fri, 13 Sep 2024 21:02:23 +0000

(Adds detail, background and analyst reaction; adds bylines)

By Ann Saphir and Howard Schneider

Sept 13 (Reuters) – The Federal Reserve is nearly as likely to deliver an outsized interest-rate cut next week as a more-usual-sized reduction, trading in rate-futures contracts suggested on Friday, as financial markets priced in a bigger chance that the Fed will move more aggressively.

A quarter-point reduction at the Fed’s Sept. 17-18 meeting is still seen as the slightly more likely outcome, but only marginally so.

Futures tied to the Fed’s policy rate now reflect about a 47% chance that the Fed will cut its policy rate, currently in the 5.25%-5.50% range, by a half of a percentage point. That’s up from about 28% on Thursday.

The market move reflects increasing bets by traders that the Fed may try to head off deterioration in the labor market, rather than take a slower see-what-happens-next approach with a smaller opening reduction.

“Our view is that the Fed is behind the curve – that it should have been easing from June even, or potentially May – and that now it needs to catch up and may have to front-load some of the rate cuts,” Parthenon economist Gregory Daco said.

Fed Chair Jerome Powell last month said he would not want to see any further cooling in the labor market, and “the time has come” to cut rates.

Since then, other Fed policymakers have signaled their sympathy with that view, including San Francisco Fed President Mary Daly who said a weakening job market would be unwelcome. Fed Governor Chris Waller said he would support front-loading rate cuts should conditions merit.

Typically Powell spends the Thursday and Friday before a policy-setting meeting in half-hour one-on-ones with each of his fellow policymakers to discuss the options on the table and the economic conditions that may warrant one over another.

The change in market sentiment amplifies a discussion that began in earnest at the Fed’s July 30-31 meeting, when “several” policymakers said there was already a “plausible case” to cut rates, according to minutes of the session – a fact that may leave some officials now advocating for a bigger increase in September if they think the Fed should have cut already.

Within days of that meeting, the case grew even stronger when the employment report for July showed the jobless rate rising to 4.3% and employers adding a fewer-than-expected 114,000 new jobs – a slow pace by recent standards that was subsequently revised down to just 89,000. Revisions to benchmark data also showed job creation for the 12 months ending in March had been slower to the tune of 818,000 positions.

The new data fueled sentiment that the Fed was slipping behind the curve in protecting the job market just as it was slow to begin hiking rates when inflation took off in 2021.

Data for August showed the unemployment rate easing back to 4.2% but job growth slowing to just 116,000 a month on average since June, well below the rate officials see as necessary to prevent the jobless rate from rising.

Powell in comments at the Fed’s annual research symposium in Jackson Hole last month made clear that rates would fall at the Fed’s September meeting. He was noncommittal, though, on how far or how fast the decline might be, or whether officials would open the door with a conventional quarter-point reduction or something larger.

THE CASE FOR BIG OR SMALL

Outside of clear economic threats, easing cycles have tended to begin with quarter-point reductions as central bankers try to reset financial conditions to account for easing inflationary pressures – and several Fed officials ahead of this meeting used words like “gradual” and “methodical” to describe the likely pace.

Others are concerned the labor market is weaker than headline data suggest. Fed Governor Adriana Kugler in particular voiced concern that alternate measures of unemployment beyond the headline rate suggest labor market conditions may be eroding faster than thought.

Alongside the interest rate decision on Sept. 18, the Fed will issue new economic projections from policymakers that will indicate how far they anticipate reducing rates by the end of the year. Investors currently expect 1.25 percentage points of cuts by then, though markets have jockeyed back and forth between bets for smaller and larger cuts over a volatile month of trading.

The way data has evolved does suggest a quicker pace of cuts than suggested not only in June, when Fed policymakers penciled in just one 25 basis point rate cut this year, but also than in March, when the median projection was for three quarter-point rate cuts by the end of the year.

In March, policymakers also saw an unemployment rate at 4% at year end and a closely watched inflation measure at 2.6%.

That core inflation measure – the Personal Consumption Expenditures price index excluding food and energy costs – hit that year-end projection in July, and the unemployment rate is now higher than they expected it to be at the end of 2024.

“Yes it is an uphill climb, but I think the Federal Reserve will cut its policy rate by 50 basis points at its upcoming meeting,” wrote Renaissance Macro Head of Economic Research Neil Dutta. “The case for doing more upfront is strong.” (Reporting by Ann Saphir; Editing by Dan Burns and Andrea Ricci)

Catch all the Business News , Corporate news , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

MoreLess

.

Source link

The post Fed seen nearly as likely to cut rates by 50 bps as 25 bps first appeared on 53c4r1t4-r3lat36.