The Federal Reserve is expected to cut borrowing costs again on Wednesday.
A further quarter-point cut following the September cut would bring the key rate to a range between 3.75% and 4.00%.
The federal funds rate, set by the Federal Open Market Committee, is the interest rate at which banks borrow and borrow money from each other overnight. Although this is not the interest rate consumers pay, the Fed's actions have a trickle-down effect on many types of consumer credit.
The FOMC has also expected another cut in December, but after that the path is unclear. President Donald Trump – who has said he could replace current Federal Reserve Chairman Jerome Powell by the end of the year – has repeatedly commented on Fed policy and argued that interest rates should be cut significantly.
It is not a given that interest rates will continue to fall, and even if they did, not all consumer goods would be equally affected.
“The Fed isn’t cutting every single interest rate.”
When the Fed raised interest rates in 2022 and 2023, interest rates on most consumer loans quickly followed suit. Even if this would be the second interest rate cut in a row for many These consumer interest rates are likely to remain higher for the time being.
“The Fed is not cutting every single interest rate there is in the world,” said Mike Pugliese, senior economist at Wells Fargo Economics.
Depending on their term, some loan rates are more sensitive to Fed changes than others, he said: “At one end of the spectrum you have shorter variable rates and at the other end you have a 30-year fixed mortgage.”
These short-term interest rates are more closely tied to the prime rate, which is the interest rate that banks offer their most creditworthy customers – typically 3 percentage points higher than the federal funds rate. Longer-term interest rates are also influenced by inflation and other economic factors.
Credit cards won’t go “from terrible to awesome overnight.”
Olga Rolenko | moment | Getty Images
According to Bankrate, nearly half of American households have credit card debt and pay an average of more than 20% interest on their revolving balances – making credit cards one of the most expensive ways to borrow money.
Since most credit cards have a short-term, variable interest rate, there is a direct connection to the Fed's benchmark.
If the Fed lowers interest rates, the federal funds rate will also fall, and the interest rate on your credit card debt will likely adjust within a billing cycle or two. But even then, credit card APRs will only fall to extremely high levels. And in general, card issuers have kept their interest rates slightly elevated to reduce their exposure to riskier borrowers.
“Even if the Fed accelerates rate cuts in the coming months, credit card rates won't go from terrible to amazing overnight,” said Matt Schulz, chief credit analyst at LendingTree.
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For example, if you have $7,000 in credit card debt on a card with an interest rate of 24.19% and you pay $250 per month on that balance, reducing your APR by a quarter point could save you about $61 over the life of the loan, according to Schulz.
Slight advantage for car and home buyers
Although car loan interest rates are fixed for the entire loan term, experts say potential car buyers could benefit if the cost of credit falls in the future.
The average interest rate for a five-year new car loan is currently around 7%. Going forward, “a modest Fed rate cut won't dramatically reduce monthly payments for consumers,” Jessica Caldwell, head of insights at Edmunds, previously told CNBC, “but it will boost overall buyer sentiment.”
Longer-term loans like mortgages are less affected by the Fed. Both 15- and 30-year mortgage rates are more closely tied to Treasury yields and the economy.
Still, expectations of more cuts in the future could put some downward pressure on mortgage rates, experts say, and that could “prompt more Americans to think about getting back into the housing market after sitting on the sidelines for so long,” according to LendingTree's Schulz.
Other home loans are more closely tied to the Fed's actions. Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are tied to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts immediately.
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