- Interest rates are expected to drop this year, but it may not be the good news Americans were hoping for.
- The Federal Reserve held the short-term benchmark interest rate steady at a high of 5.25% to 5.5% for the fourth consecutive meeting, hinting at potential future rate cuts but not as soon as some economists predicted.
- This marks a shift from the previous trend of aggressive rate hikes to combat 40-year high inflation, and it would be the first rate cut since March 2020 when the Fed lowered rates to nearly 0% at the beginning of the pandemic.
Source: CNBC Television
While this change is likely to boost the stock market, experts say it's unlikely to bring significant relief to Americans with mortgages, auto loans, credit cards, and other debts anytime soon. Sameer Samana, a senior global market strategist at Wells Fargo Investment Institute, emphasizes that cutting interest rates doesn't guarantee all rates will decrease at the same time.
Are Mortgage Interest Rates Expected to Decrease even more?
Since late last year, when predictions emerged that the Fed would reduce rates in 2024, financial markets have not only anticipated this move but gone even further. While the Fed has only hinted at three rate cuts this year, the market has already factored in six.
Although the Fed doesn't directly control mortgage rates, it does have an impact on them. In recent months, the 30-year mortgage rate has dropped from above 8% to around 7%, potentially making this a case where the expectation surpasses the actual outcome.
According to Samana, this might be the best scenario for the short term. It's crucial to note that even if the Fed does cut rates, the cuts won't be aggressive. If you've found an affordable home, it shouldn't deter you from making the purchase. As Samana suggests, you can always buy a house and refinance later if interest rates decline.
Will Interest Rates on my Credit Cards Fall?
It's doubtful that they will decrease significantly because banks will be hesitant to reduce them. Credit card debt has reached a record $1.08 trillion, and delinquencies have seen their eighth consecutive year-over-year increase from June to September of last year.
Delinquencies could turn into charge-offs that banks count as losses, according to Samana.
"Banks want to be compensated for taking those risks," he explained. However, if you have good credit, you might be in luck, but not because of the Fed. Matt Schulz, a credit analyst at the online lending marketplace LendingTree.
Mentioned that the credit card market is highly competitive. It's only a matter of time before some issuers consider slightly lowering interest rates on new card offers to attract "high-quality applicants."
Savings Interest Rates will take a Hit
Interest rates on short-term investments such as money market funds and certificates of deposit (CDs) are likely to closely and swiftly follow any Fed rate cuts, according to Daniel Milan, Some rates have already started to decline in anticipation alone.
"Signals from the Fed’s December meeting, indicating that peak rates had been reached and future moves would involve cuts, have already had an impact on CD rates," said Ken Tumin
"Several major online banks have reduced their CD rates in January. If, in the next meeting, the Fed suggests that rate cuts may be on the horizon, we can expect more reductions in CD rates."
What will stocks do if the Fed cuts Interest rates?
As the costs of borrowing decrease for businesses, lower interest rates are typically advantageous for stocks because companies can make more affordable investments in their operations.
However, caution is advised by some analysts who point out that stocks have already factored in a significant number of rate cuts—six, which is double the number the Fed has hinted at. Both the benchmark S&P 500 and the blue-chip Dow indices reached record highs in January.
"The market is essentially anticipating the Fed's moves," said Samana, indicating that stock prices will likely increase but not consistently. Additionally, some still perceive a risk of recession.
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