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The Fed is expected to cut its benchmark rate by one quarter of a percentage point to a range of 1.75% to 2%, the second rate reduction this year. When officials cut rates in July, for the first time since 2008, they framed the decision as an effort to protect the economy from potential headwinds, including a prolonged trade war with China, low business investment and a slowdown in manufacturing.

Here is a look at how the Fed’s next rate cut could affect people buying homes, paying off debt and saving for retirement.

1. MORTGAGES

Lower rates can also give home buyers more purchasing power. At a 5% interest rate on a 30-year mortgage, a buyer making a $1,000 monthly payment can afford a house worth $186,282, according to estimates from LendingTree.com, a housing website.

“Lower rates make things more affordable today,” said Kapfidze. “But I think in the long run, their impact on increasing home prices ultimately pushes out some people from the market.”


2. SAVINGS ACCOUNTS

Banks were slow to bump up the rates they pay on savings accounts despite the nine interest rate hikes pushed out by the Fed from the end of 2015 to the end of 2018. The main exception has been online savings accounts, which frequently pay interest rates north of 2%.

But online banks could reduce those interest payments if the Fed continues to cut rates. Consumers worried about low rates could put a portion of their savings in a one-year certificate of deposit, which pays up to 2.5%, said Ken Tumin, founder of DepositAccounts.com, which compares deposit rates from banks and credit unions. But some savers may not want to lock up their savings for much longer than a year on the chance that the economy avoids a recession and interest rates start to rise again, he said.


3. CREDIT CARDS

With interest rates on credit cards near record highs, a drop of 0.25 percentage point likely will not offer much relief to people struggling to pay off their debt, said Greg McBride, chief financial analyst for Bankrate.com.


4. CAR LOANS

An interest rate reduction from the Fed is not likely to have a huge effect on the cost of a car. For example, a reduction of 0.25 percentage point on a five-year auto loan for a new $25,000 car would lead to savings of about $3 a month, according to an auto loan calculator from LendingTree.com here


5. STOCK MARKET

The Fed’s 180-degree pivot from tightening monetary policy last year to lowering rates this summer helped push the stock market to record highs this year. Reaction to any further rate cuts from the Fed will depend on whether investors believe the U.S. economy is headed into a recession. Stock markets tend to rise after “insurance” cuts from the Fed, or periods when officials lower rates to address economic concerns but the economy is not in a recession.



Reference: Reuters