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Commentary: ‘Be smart with your money,’ what the FED rate cuts could mean for you

By Dwan Payne, Army Community Service Financial SpecialistOctober 9, 2024

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FORT KNOX, Ky. — Inflation is a term used to describe the rate at which prices increase, and it’s no secret that it erodes our purchasing power as daily cost increases impact what the dollar will buy.

The headlines are constantly reminding us we are facing a financial crisis.

Prices are increasing for nearly everything we purchase, often forcing us to make concessions on what we spend. Many are feeling a tug-of-war between wants and needs and the pressure of squeezing in what we can afford.

But get ready, there is hope on the horizon!

The United States economy recently announced the Federal Reserve is making interest rate cuts for the first time since March 2020.

Lower rates will translate to cheaper borrowing costs for those in the market for a home, vehicle, or those carrying pricey credit card debt - so, now what?

What does the future hold? How will consumers react? Will consumers stop spending? Will history repeat itself? Depending on who you talk to or what you read, everyone has their take on what is next. Often, when interest rates are cut, economic conditions worsen and force the economy into recession - let’s hope that doesn’t happen.

Analysts state it will take time to notice the impact of lower interest in the economy.

Research reveals Americans are rethinking what they spend, not only major purchases but discretionary expenses based on affordability as well. But, the cut may strengthen confidence among U.S. households - confidence being translated to more spending because borrowing will be less expensive. Lower interest entices individuals to take more risk.

In fact, some consumers may even grow less tolerant of price hikes, fearless of the outcome.

Research indicates we should see a small - but not dramatic - decline in interest rates on personal loans, credit cards, and vehicles in the very near future. Future cuts are predicted to transpire as well.

Here are some predictions to consider as you plan.

Credit card rates: Presently at an all-time high - Lending Tree reports current rates are between 23.18% and 24.92%.

With a .0.50-point cut, a $5,000 balance with a 24.92% Annual Percentage Rate (APR) could save a person about $1.50 a month on interest.

Keep in mind the average credit card balance is around $6,900, according to Lending Tree. Data compiled from the Federal Reserve states 4-in-10 Americans carry a monthly credit card balance. Consider consolidating your debts to a 0% balance transfer or a low personal loan if your credit score is in good standing.

Employment: The Los Angeles Times reports that historically when inflation comes down, job growth slows down; and when consumers are unemployed, they will cut back on spending. Lower rates would help support the pace of hiring.

Gasoline: Costs have decreased recently, plunging 13% since April, 2024, according to AAA.

Groceries: Grocery prices have risen 25.5% since the beginning of the pandemic, according to the Labor Department.

Each trip to the grocery is a reminder that today’s dollars don’t go as far as they did a few years ago. Remember when Grandma paid .25 cents for a loaf of bread, or so she said?

It appears grocery prices are leveling off after climbing significantly in the last two years. But, the increases continue to impact many consumers. Prices have dropped 1% in the last 12 months, according to the Federal Reserve. It is doubtful grocery prices will return to what we paid in 2019 and 2020.

Mortgage rates: According to Mortgage Bankers Association, the current 30-year mortgage average loan is around 6.20-6.46%. It is not likely interest will return to the rock-bottom level we experienced in 2020 and 2021. In August, the average interest was 7.09%, the highest in two decades. It is difficult to determine how home loans will be influenced because they are often influenced by economic factors.

Mortgage rates were declining before the rate changes, with the anticipation that the FEDs would make decreases to help consumers. It is anticipated lower mortgage rates will boost the home-buying demand.

Even with the prices escalating, housing affordability remains at level comparable to what was seen during the housing bubble that preceded the 2007-2009 financial crisis from national data the FED reported.

Pay attention to predicted rate changes in 2025. If the FED elects to make additional cuts, loan rates may go down even more. Consider refinancing if your rate is 7% or more. Generally, lenders will refinance when there is a 2-point difference, per Smart Money.

For example, a homeowner with a $400,000 mortgage could save about $400 a month by refinancing to today’s rate of around 6.3%.

Saving and investing: With the rate cut comes lower interest for savers. Many have enjoyed the recent 5-6% certificate of deposit and high yield savings. It has been an opportunity for Americans to “juice their savings.” However, those rates will slowly decline.

My advice? - Lock in those Certificate of Deposit rates now.

In 2022, 58% of American households had money in the stock market, according to FED research. The change could have a downside on the prior high returns recently enjoyed by many savers.

Morningstar suggests utilizing higher yield accounts for building better savings, which could help in light of adjustments to interest rates.

Vehicle Purchases: The average percentage rate for new car loans is between 7.1 and 8%, and 11.3% for a used car. Consumers are likely to see a rate reduction in the auto industry, according to Edmunds which reported 6-in-10 car shoppers have held off buying because of high rates.

It is important to save as much as you can. Consider putting as much as you can as a down payment to lower your monthly installment.

All said and done, it is suspected we may see consumers jump off the band wagon and begin to borrow again to support their desires.

It is consumer spending that drives up the American economy. However, the cut in rates may still be too high for the average household. Really, it is a great time to determine where you are financially and where you need to be.

Get your finances back in control. Will the mission be successful? That depends on the choices you make – good, bad or ugly.

Pay attention to your spending and do your best to set aside a little for the surprises and or emergencies that come your way.

Editor’s note: For those with financial questions, consider making an appointment with an Army Community Service financial counselor or call 502-624-5989 to schedule an in-person or virtual appointment.

Visit Fort Knox News at www.army.mil/knox for all of Central Kentucky's latest military news and information.