Experts say top money moves ahead of Fed rate cut

Last week, Federal Reserve Chairman Jerome Powell all but confirmed that interest rate cuts are imminent.

“The time has come to adjust policy,” the central bank governor said in a keynote speech in Jackson Hole, Wyoming, at the Federal Reserve’s annual meeting.

For Americans struggling to pay sky-high interest rates, the expected quarter-point cut in September could provide some welcome relief, especially if proper preparations are made. (A more aggressive half-point cut has roughly a one-in-three chance of occurring, according to FedWatch, a gauge of CME futures market prices.)

“If you’re a consumer, now is the time to ask yourself, ‘How are my expenses going? Where can I get the most out of my money, and what are my options?'” said Leslie Thain, a debt relief attorney at the Thain Law Firm in New York and author of “Life & Debt.”

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Currently, the federal funds rate is in the 5.25% to 5.50% range, its highest level in the past 20 years.

If the Fed cuts interest rates in September as expected, it will be the first time it has done so in more than four years, since slashing rates to near zero at the beginning of the coronavirus pandemic.

“From a consumer perspective, it’s important to realize that any interest rate declines will be a gradual process,” said Ted Rothman, senior industry analyst at Bankrate.com. “The rate declines will likely be much more gradual than the series of rate hikes that saw the federal funds rate jump 5.25 percentage points in 2022 and 2023.”

Here are five ways to prepare for this policy shift.

When interest rates are lowered, the prime rate will fall and interest rates on variable-rate debt (especially credit cards) will likely follow suit, lowering your monthly payment — but still only moderating your APR from extremely high levels.

For example, the current average interest rate on a new credit card is nearly 25%, according to data from LendingTree. At that rate, paying $250 per month on a card with a $5,000 balance would cost you more than $1,500 in interest and take 27 months to pay off.

If the central bank cuts interest rates by 0.25 percentage points, that could save you a total of $21 and allow you to pay off your balance a month sooner. “That’s not a huge amount, but it’s still a lot less than you’d save with a 0% balance transfer credit card,” said Matt Schultz, chief credit analyst at LendingTree.

Rather than waiting for smaller adjustments over the next few months, Thain said borrowers could switch to an interest-free balance transfer credit card now or consolidate their high-interest credit cards into a lower-interest personal loan to pay them off.

With interest rates on online savings accounts, money market accounts and term deposits all set to fall, experts say now is the time to lock in the highest yields in decades.

Currently, the highest-yielding online savings accounts offer returns above 5%, which is well above the rate of inflation.

Those rates would fall if central banks cut base rates, but a recent survey conducted by Santander Bank in June found that a typical saver with about $8,000 in a checking or savings account could earn an extra $200 a year by moving that money into a high-yield account that pays 2.5% or more in interest. The Santander Bank survey found that the majority of Americans keep their savings in traditional accounts, which currently pay an average of 0.46% interest, according to FDIC data.

Alternatively, “now is a great time to lock in the most competitive CD yields at rates well above your targeted inflation rate,” said Greg McBride, chief financial analyst at Bankrate Inc. “There’s no point waiting around in the hope of getting a better yield later.”

Currently, the highest-yielding one-year CDs offer rates above 5.3%, according to Bankrate, which is on par with high-yield savings accounts.

If you’re planning on making a big purchase, such as a home or a car, it may be better to wait, as lower interest rates could reduce your future financing costs.

“Time your purchase when interest rates are low, and you’ll save money over the life of your loan,” Thain said.

Mortgage rates are fixed and tied to Treasury yields and the economy, but they have already started to fall from recent highs, largely due to the Fed’s forecast of a slowing economy. The average rate on a 30-year fixed-rate mortgage is now just under 6.5%, according to Freddie Mac.

Compared to the most recent high rate of 7.22% in May, today’s lower interest rate on a $350,000 loan could save $171 a month, $2,052 a year, or $61,560 over the life of the loan, according to calculations by Jacob Channell, senior economic analyst at LendingTree.

But going forward, lower mortgage rates could boost home buying demand and drive up prices, McBride said. “If lower mortgage rates lead to a surge in prices, that could offset the benefits of home buying for prospective buyers.”

What actually happens in the housing market is “still to be determined,” depending on how much mortgage rates fall and supply levels later this year, according to the channel.

“It’s virtually impossible to time the market,” he said.

For those struggling with existing debt, lower interest rates may open up more refinancing options.

For example, private student loans tend to have floating interest rates that are tied to the prime rate, Treasury bills, or other interest rate indexes, so when the Fed begins to cut interest rates, interest rates on private student loans will fall as well.

Eventually, borrowers who already have adjustable-rate private student loans may be able to refinance to cheaper fixed-rate loans, according to higher education expert Mark Kantrowitz.

Currently, fixed interest rates on private mortgage refinances are as low as 5% and as high as 11%, he said.

But by refinancing your federal loans with private student loans, you lose the safety nets that come with federal loans, such as “payment deferrals, grace periods, income-contingent repayments, and options for loan forgiveness or forgiveness,” he added. Plus, extending the term of your loans means you’ll end up paying more interest on your balance, he said.

Be mindful of the possibility of extending the loan term, cautioned David Peters, founder of Peters Professional Education in Richmond, Va. “Consider maintaining your original payments after refinancing to reduce your principal as much as possible without changing your out-of-pocket cash flow,” he said.

Similar considerations may apply to refinancing a mortgage or auto loan, depending on your existing interest rates.

If you have good credit, you may already qualify for a lower interest rate.

When it comes to auto loans, for example, there’s no doubt that inflation has taken a toll on financing costs — and vehicle prices — with the average interest rate on a five-year new car loan now sitting at nearly 8%, according to Bankrate.

But in this case, “the loan is one variable, and frankly it’s one of the smaller variables,” McBride said. For example, he calculated that a 0.25 percentage point drop in interest rates on a $35,000, five-year mortgage would translate into a monthly cost of $4, he said.

McBride said in this case, and many other situations, consumers could benefit more by paying down revolving debt and improving their credit scores, which could pave the way for even better loan terms.