Will you be better or worse off after a Fed rate cut? Find out here.
See who the winners and losers are when the fed cuts
interest rates.
Key Takeaways
- The
Federal Reserve shapes the economy by adjusting the fed funds rate, which
directly affects certain borrowing costs for consumers and businesses.
- Lowering
rates tends to benefit those with variable-rate loans and investors in the
stock market, while savers, banks and retirees may be negatively impacted.
- Changes
in interest rates affect most consumer financial products, beginning with
variable-rate credit.
The Federal Reserve met Nov. 7 and cut interest rates by 25
basis points (0.25 percentage point). This move was in line with previous Fed
announcements and was widely expected. A Fed rate cut is good financial news
for many but bad news for others.
Curious to learn who will benefit and who won't from a
Federal Reserve rate cut? Read on for more details about how a Fed rate cut
works and the winners and losers of lower rates.
See who the winners and losers are when the fed cuts
interest rates.
Key Takeaways
- The
Federal Reserve shapes the economy by adjusting the fed funds rate, which
directly affects certain borrowing costs for consumers and businesses.
- Lowering
rates tends to benefit those with variable-rate loans and investors in the
stock market, while savers, banks and retirees may be negatively impacted.
- Changes
in interest rates affect most consumer financial products, beginning with
variable-rate credit.
The Federal Reserve met Nov. 7 and cut interest rates by 25
basis points (0.25 percentage point). This move was in line with previous Fed
announcements and was widely expected. A Fed rate cut is good financial news
for many but bad news for others.
Curious to learn who will benefit and who won't from a
Federal Reserve rate cut? Read on for more details about how a Fed rate cut
works and the winners and losers of lower rates.
Who Wins When the Fed Cuts Interest Rates?
A Fed rate cut creates a ripple effect across various
savings and loan products. Following a rate cut, interest rates on loans,
including credit cards, small-business loans and student loans, tend to go
down. Likewise, the interest rates banks pay on savings, certificates of
deposit and money market accounts also decrease.
Winner No. 1: Credit Card Users
If you have credit
card debt, you may get some relief in the form of lower interest payments.
"Consumers with credit card balances win, since the interest rates for
these are typically variable and tied to the prime rate – which directly
corresponds to the fed funds rate," says Sarah Alvarez, the New York
City-based vice president of Mortgage Banking for William Raveis Mortgage.
The average credit card interest rate, for accounts that
charge interest, was 23.37% as of August 2024, according to the Fed. When the
Fed cut interest rates this month by 25 basis points (0.25 percentage point),
the prime rate (which credit card rates are based on) should decrease to 7.75%,
which could bring the average credit card rate down to 23.12% assuming other
factors, like accountholder creditworthiness, don't change.
That said, a 25-basis-point rate cut lowers the borrowing
cost on a $10,000 balance by $25 a year, or about $2 a month.
Winner No. 2: Borrowers
Although consumers with fixed-rate loans typically don't
benefit from a Fed rate cut, borrowers with variable-rate
loans, including those with adjustable-rate mortgages or home equity lines
of credit should see their monthly interest payment decrease.
For example, assume you've drawn $250,000 from your HELOC.
At 8%, you'd be paying $1,667 a month (interest only). But when the Fed cuts
rates by 25 basis points, dropping the prime rate to 7.75%, your monthly
payment could decrease by $52 to $1,615.
Keep in mind that rates for fixed-rate mortgage loans are
more closely tied to other factors, including the 10-year Treasury note and
investor demand for mortgage-backed securities.
"Mortgage borrowers should not expect much of a
near-term decline, as mortgages are funded typically by mortgage-backed
securities," cautions Guy Silas, branch manager for Embrace Home Loans in
Rockville, Maryland. "While these closely track federal funds, they are
not the same and, in fact, mortgage-backed securities typically trade in
anticipation of Fed actions. So if the Fed cuts rates by 0.25 (percentage
point) as anticipated, we do not expect much change in mortgage rates."
Winner No. 3: Investors
Historically, stock investors have been big winners when the
Fed slashes rates. Robert Johnson, finance professor at the Heider College of
Business at Creighton University in Omaha, Nebraska, found that, from 1966
through 2023, the S&P 500 index returned 16.4% when the Fed lowered
interest rates but only 6.2% when the Fed hiked rates.
"The best-performing sectors in a falling interest rate
environment were autos, apparel and retail. The worst-performing sectors in a
falling rate environment were utilities, consumer goods and financials,"
Johnson says.
Who Loses When There Is a Fed Rate Cut?
Not everyone benefits from falling interest rates. Here's a
closer look at those who don't fare as well.
Loser No. 1: Savers
A reduction in the fed funds rate doesn't benefit savers,
who have been enjoying yields of 4.5% or higher on savings
accounts, certificates
of deposit and money market
accounts.
"The yield they will receive will go down in direct
correlation, so a CD or savings rate will reduce accordingly," Silas says.
Loser No. 2: Banks
Depending on their assets and liabilities, banks could be
adversely impacted by a Fed rate drop.
"For example, if most of a bank's loans are
floating-rate, and the Fed cuts rates by 0.5 (percentage point), the bank would
see a decline in the interest income it collects on loans," Safer notes.
"This would be somewhat offset by the bank's ability to lower the rate it
pays on deposits, but not fully."
Loser No. 3: Retirees
Retirees living on fixed incomes and relying on interest
payments could feel pain when
rates are cut. That's because lower rates decrease yields, diminishing the
income generated from bonds, CDs and other fixed-income instruments that
retirees often invest in.
Kass says that a 25-basis-point rate cut would cost Treasury
bill investors $250 per year.
