"Relief is on the way:" Borrowing money is about to get cheaper
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Prices that skyrocketed during the inflation crisis likely won't come down — but with the Fed finally cutting rates, the cost of borrowing money soon will.
Why it matters: For the first time in about a half-century, Americans have faced a double whammy of high inflation and historic rates for credit cards, auto loans and more.
- The Federal Reserve will announce an interest rate cut on Wednesday after keeping rates at a near two-decade high since last summer.
- That rate cut — and what the Fed signaled about future cuts — will reverberate through the economy, easing pressure on consumers as signs of stress mount.
Between the lines: Although the higher cost of money isn't included in typical inflation data, it has been another cost that makes day-to-day life feel less affordable than pre-pandemic times.
- "Squeezed between high prices and high interest rates, the message behind even a modest initial cut will be that relief is on the way," Elizabeth Renter, an economist at NerdWallet, wrote this week.
The intrigue: Non-mortgage interest payments make up an historic share of consumer spending — excluding the peak last fall, it's the largest share since the financial crisis.
- The average credit card rate was 16% at the start of 2022, before the Fed started hiking rates, according to BankRate. Now: almost 21%, near the highest on record.
- An average five-year loan for a new car was 3.9% in early 2022. Now it is nearly 7.7%.
On the positive side, savers earned more on money in savings accounts, particularly those held with online banks, alongside the Fed's rate hike announcements. Those rates are falling.
What to watch: For current borrowers, the Fed's pending rate cuts mean lower rates for variable rate products like credit cards.
- Relief on monthly credit card bills might look small at first, maybe a savings of a few dollars, Charlie Wise, head of global research and consulting at credit reporting agency TransUnion, tells Axios.
- "But if rates continue to drop over time, that does start to really add up in terms of how much consumers pay on interest for credit cards," Wise says.
The impact on longer-term rates, particularly for home mortgages, is more ambiguous. These rates are set in global markets based on how investors expect the economy to evolve over many years, not just in reaction to the latest Fed decision.
- Rates have already fallen significantly over the last couple of months — from 7.4% in early May to 6.3% as of last week — as the prospect of Fed rate cuts grew, according to Bankrate.
- What happens to those rates after the Fed's announcement is unclear — it depends on how bond traders interpret the central bank's communications.
- Most existing home mortgages in the U.S. have fixed interest rates, so homeowners will feel relief only if rates fall enough to justify refinancing their loan. Households with variable rate mortgages should see relief more immediately.
The bottom line: Financing big-ticket items will look more affordable, though it's unlikely rates will come down as quickly as they went up.
- "There are consumers that are sitting on the sidelines — maybe they are waiting to replace a vehicle," Wise says. "Lower rates might be that that trigger for them to get back in the market."
