Fed cuts interest rates! What will be the impact for people living in US?

Federal Reserve’s decision to cut interest rates for the second time this year is expected to have wide impacts among consumers in US. On Wednesday, Fed decided to slash interest rate by 25 basis points, bringing the interest rate to the range of 1.75 to 2%. Amidst many signs of the economy slowing down, Fed believes that this decision will help to boost the economic growth. The major theory behind interest rate cut is that as the loan interest rates will come down, it will encourage businesses to hire more people and expand production. So, at times of economic slowdown, such measures are taken.

 There can be several other impacts to consumers due to the slashed rate by Fed. Some of these are:

Mortgage loans: The FED interest rate cut will result in lower rates for refinancing new houses. The borrowers of Fixed Rate Mortgages may not find an impact on their loan payment. However, borrowers of Adjustable Rate Mortgages might have to pay lower monthly payments for their loans. A year ago, the average rate for mortgages was 4.60, however, it’s currently at 3.60%. This rate is further expected to go own after interest rate cut.

Savings: US banks had been slow to provide high interest rates in deposits. Just when banks had started raising their deposit rates after nine interest rate hikes by Fed, now the deposit interest rates are predicted to go down. Consumers are likely to switch to Certificate of Deposits that pays up to 2.5%. However, the fear coupled with an economic recession might not encourage consumers to lock up their savings in Certificate of Deposits.

Credit cards: The impact of Fed interest rate cuts on credit cards typically depends on the type of credit card. The credit card with fixed interest rates might not be impacted by the Fed interest rate cuts. Many consumers have credit cards with variable interest rates. Such credit cards are linked to prime rates, the rates that banks charge on most creditworthy consumers, and prime rates usually go down after Fed interest rate cuts. Therefore, cardholders can find a difference in their Annual Percentage Yield.

Student’s loans: A lot of students are indebted with loan. The student loans may also be either fixed or variable rate; the loans with variable rates are typically tied to LIBOR or prime rate. So, the borrowers can make less payment, however by how much will the difference be depends upon the benchmark of the loan.

Auto loans: The 25 basis points decrease means a difference of $3 on a $25000 loan, writes CNBC. Therefore, a big impact will not be seen to those who are thinking of purchasing a new car. Auto loan rates have remained low throughout the nine interest rate hikes from 2015 to 2018. However, the fed interest rate cuts might benefit manufacturers and dealers as they are likely to face lower financing costs.

These are some of the impacts that each category of loan will face after the Fed interest rate cuts.