The Federal Reserve cut interest rates again, trimming the federal funds rate by 0.25 percent to a range of 1.5 percent to 1.75 percent. It marks the third consecutive time that the central bank has slashed rates, as the Fed tries to stay ahead of a slower economy. The decrease was widely expected by analysts, and follows a series of four rate hikes in 2018.
However, the decrease is only the third time that the Fed has lowered interest rates since 2008, in the midst of the global financial crisis. The latest series of cuts has been prompted by slowing economic growth and other factors, such as trade tensions with China, that are hitting the economy.
Many Fed watchers had anticipated the move, given the somewhat dimmer economic picture. While unemployment remains at historically low levels, growth in gross domestic product (GDP) slipped to 1.9 percent from the second quarter’s 2 percent rate.
There are still many experts that view the rate cut as a preventive measure, as insurance to keep the economy on track, and the Federal Reserve has called this series of decreases a “mid-cycle adjustment.” Lower rates encourage more money into the economy, inducing businesses to invest and consumers to spend and borrow. That keeps money flowing through the economy.
The Fed has also taken other steps to keep short-term interest rates near its target range. The central bank has injected tens of billions of dollars into the banking system via repurchase agreements (repo), a transaction where banks trade securities for cash for a preset time period. After an initial foray into the repo market in September, the Fed says it has extended the move into at least early November. It’s also been buying U.S. government debt to hold on its balance sheet longer term.
However, while lower interest rates help some groups, they don’t help everyone. Here’s who stands to benefit the most from lower rates, and also who could be hurt by them.
While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons.
Last year, the Fed raised rates on the belief that a stronger economy could handle higher rates, and mortgage rates climbed as well during much of that period. As investors began to anticipate a slower economy, they pushed the yield on the 10-year Treasury lower in 2019, and that hit mortgage rates well before the Fed even acted.
“The mortgage refinancing window remains wide open, with mortgage rates now on par with what we saw when the Fed cut rates in September and July,” says Greg McBride, CFA, Bankrate chief financial analyst. “Further, mortgage rates are a full percentage point lower than they were this time last year, giving recent homebuyers the opportunity to refinance and trim monthly payments by $100 or more from what they’d been last year.”
Losers: Losers include those who are unable to take advantage of lower rates, perhaps because they’re underwater on their house or maybe they’ve locked in a fixed-rate mortgage and today’s rates aren’t quite low enough that it makes sense to refinance.
Still, rates are well below where they were six months before the Great Recession, when the average 30-year mortgage cost 6.74 percent. So rates remain low by historical standards, and a weakening economy could lower mortgage rates further.
A home equity line of credit (HELOC) will adjust relatively quickly to the lower federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers. So when the Fed adjusts its rates, the prime rate usually follows immediately.
Winners: Rates on HELOCs should fall by the amount of the rate cut, so those with outstanding balances on their HELOC will have lower interest expense. The lower rate is also beneficial for those looking to take out a HELOC, and it can be a good time to comparison shop for the best rate.
Losers: If you can’t take advantage of the lower rates on your HELOC – for example, some HELOCs let you lock in a fixed rate on a portion of your borrowing – then the rate cut doesn’t benefit you, and you might otherwise be paying less.
[READ: The pros and cons of a HELOC]
CDs and savings accounts
Falling interest rates mean that banks will offer lower interest rates on their savings and money market accounts. CDs typically also see a decline in rates, though these products tend to reflect much of the lower yield before the Fed actually implements the cut.
Winners: CD owners who locked in rates recently will retain those rates for the term of the CD. However, if rates continue to fall, these savers will have a hard time getting the same high rates that they have now when they have to roll over their CD.
Losers: Savings accounts will feel the brunt of lower rates, as banks are likely to fairly quickly ratchet rates lower following the Fed’s move. Any other variable-rate products, such as money market accounts, will also move lower.
“Returns for online savings accounts will drift lower following the latest rate cut but will remain light years ahead of the 0.1 percent that most banks are paying, and where most consumers have their savings stashed,” says McBride.
Savers looking to maximize their earnings from interest should turn to these online banks, where rates are typically much better than those offered by traditional banks.
Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. So as the federal funds rate changes, interest on variable-rate cards is likely to quickly adjust, too.
Winners: If you have an outstanding balance on your cards, then a lower rate is welcome news, but it’s important to keep the lower rates in perspective.
“Credit card rates will move lower for most cardholders, but more slowly than they’d increased when rates were rising,” says McBride. “Don’t expect to see that lower rate on your account for another 60 to 90 days, as issuers drag their feet on passing along lower rates.”
In addition, it could be a welcome opportunity to find a new credit card with a lower rate.
Losers: Lower rates on credit cards is largely a non-issue if you’re not running a balance.
The latest Fed move will likely lower interest rates on auto loans. While auto loans are influenced by the direction and trend of the federal funds rate, they don’t move in lockstep.
Winners: Lower rates are a nice bonus for those who are looking to take on a new car loan, since they’ll reduce the interest expense and help you get that car paid off at a lower overall cost. Of course, it’s important to shop around for the best rate, too, since that can do more in the short term than waiting to see whether rates continue falling.
Losers: You might feel bad if you’ve just locked in your car loan, but the difference in the loan’s overall cost for even a few quarter-point rate declines is relatively small.
The stock market
Lower interest rates are generally a positive for the stock market. Lower rates make it cheaper for businesses to borrow and invest in their operations, and so companies can expand their profits at a lower cost. In addition, lower rates make stocks look like a more lucrative option for investors, so stock prices tend to rise when rates are cut, if the economy looks strong otherwise.
The stock market tends to price in the potential for a rate cut weeks or months before it actually takes place. For example, the S&P 500 hit all-time highs even before the Fed cut rates for the first time earlier this year.
Winners: Stock investors have done well as it became clearer that the Fed was on board to lower interest rates. The market pushed up many stocks in anticipation. Bond investors have also done well, as lower rates — or the expectation of them — raised the price of bonds.
Losers: Paradoxically, while stock investors may benefit in the short term as rates decline, the increased prices may set up investors for losses in the medium term. If the economy weakens further and the Fed cuts rates again, investors may begin to anticipate that a recession is looming and quickly sell off stocks. So today’s winners can quickly become tomorrow’s losers.
[READ: 15 best investments in 2019]
With the economy signaling some weakness and unemployment near historic lows, you’ll want to consider how much longer the economy’s expansion can continue. When the economy enters a recessionary period again, rates should fall, so it may make sense to make your money moves (such as locking in higher CD rates) while you can still receive relatively high yields.
- 5 ways the Fed’s interest rate decisions impact you
- CD rates forecast: How low yields could fall by the end of 2019
- 8 best long-term investments