No quick relief: Why Fed rate cuts won't make borrowing easier anytime soon

Interest rates are expected to start dropping this year, but they may not be the ones Americans are hoping for. 

The Federal Reserve kept its short-term benchmark interest rate steady on Wednesday at a 23-year high of 5.25% to 5.5% for a fourth straight meeting and indicated rate cuts are possible down the road, though perhaps not as soon as some economists had predicted.

It’d be a reversal of the aggressive rate hikes over the past couple of years to cool 40-year high inflation and the first rate cut since March 2020. The Fed slashed interest rates at the onset of the pandemic to nearly 0% to help keep the economy afloat as global economies shut down to slow the spread of COVID-19.  

While such a pivot on rates would likely boost the stock market more, it’s unlikely to give Americans significant relief on mortgages, auto loans, credit cards and other types of debt any time soon, financial experts say. 

“Cutting rates doesn't mean all rates will shift lower in parallel fashion,” said Sameer Samana, senior global market strategist and investment adviser at Wells Fargo Investment Institute.  

Learn more: Best current CD rates

Fed rate decision:Will interest rates hold steady as inflation eases?

Will mortgage rates fall further? 

Since people started forecasting late last year that the Fed would lower rates in 2024, financial markets have already anticipated the move – and more. The Fed has only suggested three rate cuts this year, but the market has already priced in six.  

The Fed doesn’t control mortgage rates but influences them. The 30-year mortgage rate in the past few months has tumbled to around 7% from above 8%, which could end up making this one of those instances when the anticipation is better than the realization. 

“Maybe this is as good as it gets for at least the short run,” Samana said. Also, keep in mind that if the Fed cuts rates, “we’re not talking about aggressive cuts.” 

If you’ve found a nice, affordable home, that shouldn’t stop you from buying it. “You can always buy a house and refinance later if rates fall,” Samana said.  

Will interest rates on my credit cards fall? 

They’re unlikely to fall significantly because banks will be loath to drop them.  

Credit card debt is a record $1.08 trillion, and delinquencies notched their eighth consecutive year-over-year gain from June to September last year to reach the highest delinquency rate since early 2012. On the “off chance” the economy slows sharply, delinquencies may turn into charge-offs that banks take as losses, Samana said.

“Banks want to get paid to take those risks,” he said. 

If you have good credit, though, you may get lucky. No thanks to the Fed. 

“The credit card marketplace is so crazy-competitive that it’s probably only a matter of time before some issuers tinker with lowering rates on new card offers, even just a tiny bit,” to attract “high-quality applicants,” said Matt Schulz, credit analyst at online lending marketplace LendingTree.   

“Folks with poor or thin credit likely won’t see the rates they’re offered fall anytime soon,” he said. 

Will I be able to get a good rate for a car? 

Auto loans will mimic credit cards.  

Borrowers’ rates are based on factors like credit background, vehicle price, down payment and the lenders’ borrowing costs and risks.  

Lenders may be hesitant with the percentage of subprime auto borrowers at least 60 days past due on their loans rising to 6.11% in September, the highest in data going back to 1994, according to Fitch Ratings. The rate had eased to 5.94% in December but remains elevated. 

Cox Automotive also estimates that 1.5 million vehicles will be repossessed this year, up from 1.2 million last year, although that’s still below pre-pandemic levels. 

Those with good credit may benefit from competition between lenders and secure a slightly lower rate, while those with weaker credit profiles will continue seeing double-digit rates, said Greg McBride, chief financial analyst at financial services company Bankrate. 

But rates alone have “a pretty limited impact on affordability,” he said. “For most auto buyers, it’s not the interest rate that’s busting the budget...The difference between 8% and 7.25% on a $40,000 loan is about $14 per month – on an $800 per month loan.” 

Instead, it’s price. The average new vehicle transaction price remains 18% higher than pre-pandemic, Kelley Blue Book said. 

Savings rates will take a hit 

Interest rates on short-term holdings like money market funds and certificates of deposit (CDs) “will move almost in exact correlation and quickly” with any Fed rate cut, said Daniel Milan, managing partner at investment management firm Cornerstone Financial Services. 

Some already have started to drop, just on mere anticipation.  

"Signals from the Fed’s December meeting that suggested that peak rates had been reached and future rate moves would be cuts have already impacted CD rates,” said Ken Tumin of DepositAccounts.com, which tracks banking products. “Several major online banks have lowered their CD rates in January. If at the next meeting, the Fed signals that rate cuts may be coming, more CD rate cuts should be expected.” 

Fed signs:Fed holds rates steady as inflation eases, forecasts 3 cuts in 2024

What will stocks do if the Fed cuts rates? 

As borrowing costs drop for businesses, lower rates generally are a boon to stocks because companies can invest in their businesses more cheaply.  

Some analysts warn, though, stocks reflect a lot of rate cuts – six, or twice as many as the Fed has suggested. The benchmark S&P 500 and blue-chip Dow indices set record highs in January. 

“The market is kind of front-running the Fed,” said Samana, noting stocks will probably rise but in fits and starts. 

Besides, some still see recession risk. 

“We lowered our year-ahead recession probability from 55% to 45% earlier this month, but 45% is still an elevated recession probability,” said BeiChen Lin, investment strategy analyst at advisory firm Russell Investments. "In a ‘normal year’, there might be only a 15% to 20% probability of recession," he continued, adding, "Given that the markets might be underappreciating recession risk, we would caution investors not to chase into short-term equity rallies.” 

What will government bonds do if the Fed lowers rates? 

When the Fed lowers rates, bond yields will fall but bond prices will rise because the two are inversely related. 

So 'go long,’ investment advisers say.  

Even if you can still get a higher return now on short-term investments like money market funds and CDs, you should start moving money into longer-dated securities to lock in a not-too-shabby, low-risk yield in the 4% range.  

The problem with chasing slightly higher yields now in short-term investments is “reinvestment risk.” Every time your short-term holding matures, you must reinvest and risk doing so at a lower interest rate in the future. 

Should I change my 401(k) allocations? 

Retirement funds, including your 401(k), are highly individualized and allocations should be based on factors like goals, age, and risk tolerance. However, the classic 60/40 portfolio is making a comeback, advisers say. 

A 60/40 portfolio generally consists of 60% stocks to grow your money and 40% fixed income to provide you income, without a lot of volatility and risk. 

The 60/40 portfolio lost money in 2022 when stocks and bonds both underperformed at the same time, but rebounded in 2023.

This year, it’s expected again to be positive, though not stellar, mostly because the stock market has rallied so much already in anticipation of Fed rate cuts, according to Goldman Sachs. It forecasts the portfolio may return between 4% and 5% but be less risky than in prior years. 

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.