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Interest rate cuts could come soon. See what this means for your finances.
Rate cuts would bring benefits to many consumers – but not everyone, experts said.
December 15, 2023, 6:15 am ET
• 5 minutes of reading
A Federal Reserve announcement rose all three major stock indexes to one-year highs on Wednesday — and the enthusiasm owed little to what the central bank actually did.
In addition to suspending its benchmark interest rate, the Fed predicted a series of rate cuts next year. The measure would begin to reverse an almost historic sequence of rates increases which caused borrowing costs to soar.
The anticipated interest rate cuts would bring relief to many consumers — but not everyone, financial experts told ABC News.
Rate cuts would ease the burden on borrowers on everything from home mortgages to credit cards and autos, making it cheaper to get a loan or refinance. The cuts would also boost company valuations, potentially helping to boost shareholder returns.
Savers, however, risk losing income as interest rates fall on accounts held at banks.
“The Fed is going to come in and ease a lot of pressure on households next year,” Mark Zandi, chief economist at Moody’s Analytics, told ABC News. “It won’t be for every family.”
Earlier this year, mortgage rates Reached its highest level in more than two decades; while the average rate for credit card holders surpassed any value ever recorded at the Fed. Interest rates on auto loans soared to levels last seen at the start of the 2008 financial crisis, Edmunds found.
Interest rate cuts would reduce many of these payments, providing gains for borrowers. On Thursday, mortgage rates fell below 7% for the first time since August, Freddie Mac said in a statement.
“It’s a really big shift for consumer finance,” Derek Horstmeyer, a finance professor at George Mason University School of Business, told ABC News.
Christine Benz, director of personal finance at Morningstar, echoes the sentiment. “Lower interest rates would obviously be fabulous news for anyone in the market for home mortgages or adjustable-rate loans,” Benz told ABC News.
Federal Reserve Board Chairman Jerome Powell speaks during a press conference on Federal Reserve monetary policy at the Federal Reserve, December 13, 2023, in Washington. Alex Brandon/AP
A potential set of rate cuts next year could also bring strong stock market performance, some experts said, since the value of companies often rises as interest rates fall. The three main stock indexes rose on Thursday, in an apparent extension of the previous day’s rally.
However, market performance may not match the surge of recent days because forward-looking investors are now anticipating rate cuts, leaving less room for a boost when the policies take effect, Zandi said.
“I wouldn’t count on stock prices continuing to skyrocket,” Zandi said. “The window for that is probably already closing.”
Meanwhile, the promise of good financial news turned sour for savers.
The aggressive series of rate hikes since last year has spurred a rise in interest rates for savings accounts at banks. Furthermore, the trend gave rise to a wave of high yield savings accounts that offer up to 5% annual income.
A reversal of Fed policy would certainly cause these yields to fall, experts told ABC News.
“Savings account yields are the most attractive they’ve been in years, but they can change quickly when interest rates change,” Benz said. “It’s a good reason not to invest too much of your portfolio in safe investments with the expectation that high returns will persist indefinitely.”
“The possibility of interest rate cuts next year highlights how transitory the returns you get on safe investments are,” Benz added.