The Federal Reserve is poised to announce its first interest rate cut in four years today. 

After an aggressive campaign of raising the federal funds rate—the benchmark for other interest rates consumers and businesses pay—to fight inflation by cooling the housing market, the Fed is finally ready to bring that campaign to a halt.

What does this mean for most Americans? Well, nothing—at least right away. It will take time and multiple cuts for consumers to feel measurable impacts on the interest rates they pay for consumer debt.

However, if the rate cuts continue, it could thaw out the housing market by drawing sellers and buyers into the market and spurring a house-buying boom.

Once again, we are living through a real-life economics 101 lesson about how government policies can help or hurt the economy.

Here are 5 ways your wallet may get relief from interest rate cuts… in time:

  1. Auto loan rates should fall eventually. Don’t expect your car note to drop much at all right away. “The impact of a single interest rate drop by the Federal Reserve, whether it’s a quarter-point or a larger half-point is pretty immaterial for car buyers,” Greg McBride, chief financial analyst at Bankrate, told Cars.com. “The difference of a quarter percentage point on a $35,000 five-year loan is $4 a month.”
  2. Credit card interest rates will fall on debt. Sarah Alvarez, the New York City-based vice president of Mortgage Banking for William Raveis Mortgage told U.S. News that “Consumers with credit card balances win, since the interest rates for these are typically variable and tied to the prime rate – which directly corresponds to the fed funds rate.”
  3. Some mortgage rates might come down. Borrowers with variable-rate loans, such as adjustable-rate mortgages or home equity lines of credit, should see their monthly interest payment decrease, but those with fixed rates will have to keep waiting for other forces to change. Guy Silas, branch manager for Embrace Home Loans in Rockville, Maryland, cautioned that “Mortgage borrowers should not expect much of a near-term decline, as mortgages are funded typically by mortgage-backed securities… Mortgage-backed securities typically trade in anticipation of Fed actions. So if the Fed cuts rates by 0.25% as anticipated, we do not expect much change in mortgage rates.”
  4. Refinancing higher mortgage rates becomes more attractive. Applications to refinance rates are climbing as homebuyers who purchased in the last couple of years will seek to cut down their rates and monthly bills by a significant amount as mortgage rates fall. “The average refi candidate with a high credit score and significant equity in their home would save $299 a month by refinancing,” according to Intercontinental Exchange.
  5. Savings rates will fall but not much, thankfully. Savers have been rewarded by higher interest rates, especially if you’ve parked money in high-yield savings vehicles such as CDs. The good news is that while rates may start to fall it will take time for them to fall to the level that they are not outperforming inflation. Experts suggest locking in higher rates on vehicles like CDs now before rates fall further.

Background

Inflation peaked at 9.1% in June 2022 after being touched off in early 2021 by massive federal spending. The Federal Reserve took its time to do anything, at first believing that inflation was “transitory.”

Eventually, the Fed hiked interest rates 11 times. Rates have remained unchanged since August 2023, ranging around 5.25%-5.50%, the highest since 2001, according to Bankrate.

Interest rates are a tool that the Fed uses to impact economic conditions and monetary policy. In this case, the Fed is using monetary policy to fix fiscal or spending policies during the pandemic that drove inflation to 40-year highs and have kept price levels high even as the rate at which prices are rising has fallen.

Unemployment is beginning to tick up, and real wages (income adjusted for inflation) have not kept pace with price increases for most of the past few years. The Fed’s actions have been effective in bringing the rate of inflation down, but prices still remain high, and the inflation rate is still above the Fed’s 2% target, or 1.4% rate at the start of 2021.

Bottom Line

To bring prices down, companies must be able to expand supply by ramping up production of goods and services. A deregulatory agenda that makes producing goods and offering services easier and less costly gets us there. Until that happens, we may have lower interest rates but high prices for a much longer period than most people would want or hope for.