Will the United States Government Cut Interest Rates?
As the summer comes to an end, it has become increasingly more difficult for the United States government to hide the fact that the US is entering a recession. Unemployment is up, and several businesses are making cuts and layoffs due to low sales.
As such, the US government has announced plans to cut rates, but will they really do it? Will it be enough to stimulate the economy? Keep reading to learn more.
Is the Fed Going to Cut Rates?
Of course, nothing about the US government is certain, but most analysts are reasonably certain that a cut in interest rates is coming in September. This is good news for those who have stopped buying due to the current 5.5% interest rate, which has been in place since July 2023.
Don’t get too excited, though, as the rate cut won’t be that significant, we don’t think. Probably just a 0.25% or a 0.5%. Nothing like the bottom of the barrel rates that many buyers took advantage of in 2021 and 2022.
If the interest rate does come through in September, it is estimated to take place in mid-September. It is most likely (68% chance) to only be a 0.25% rate cut.
Related: Is an Economic Recession Coming in 2024?
Will a 0.25% Rate Cut Really Stimulate the Economy?
Honestly, no. A 0.25% change in the Federal Interest Rate will do little to stimulate the economy. While it might encourage some institutional lenders to borrow more money, it will not benefit the average consumer enough to make a difference.
How do we estimate this? Based on mortgage lending, which is the most common reason that the average citizen is exposed to federal mortgage rates. For example, a lender with a $180,000 home loan paying 30% currently pays $817 per month with a 5.5% interest rate (which is likely lower than they will get btw, as the bank frequently tacks on a percent or three).
If the interest rates change to 5.25% on September 18th, that same homeowner will pay $795 per month instead of $817. While this is a savings of $23 per month, it’s not enough to get someone who previously was not able to be approved for a mortgage on their dream home a mortgage—meaning the housing market will likely stay the same.
Not only that, but due to recent levels of inflation in the United States, many analysts think this rate cut could hurt foreign investments more than it would help them, as even the smallest rate cut could scare off potential investors.
Related: Is the United States in a Silent Depression?
Are There Other Rate Cuts Coming?
Of course, this upcoming meeting isn’t the only one on the books for the Federal Reserve, and some of the more positive analysts believe that in the remaining three meetings of 2024, they will cut the rate by 0.25% at each meeting.
Obviously all of this is speculation, and you shouldn’t count on this happening. Even if it does, interest rates will remain at 4.75% which is still a bit high for the average homeowner—though this will be enough of a rate cut to get someone a mortgage who may not have qualified previously as it results in an almost $100 per month decrease in mortgage from the numbers we presented in the section about.
How to Prepare for Rate Cuts
Rate cuts are not always a good thing, especially for some types of investors who need the value of the US dollar to remain higher. If that’s you, and even if it’s not, here are some steps to take before the coming rate cut to ensure financial stability.
Lock in High-Yield Investments
If you have CDs or other high-yield investments, the time to lock them in is now. Especially if you are in your final few years of retirement. You want a high return rate, as this may be your only chance to outpace inflation!
Wait to Apply for New Credit Cards
Credit card debt is at an all-time high due to high interest rates, and if you plan to transfer your debt to a new card, we recommend waiting for the rate cut. While it won’t significantly reduce the amount you owe in debt, it will make it cheaper to pay off your debt on the new card.
Don’t Plan to Refinance
High-cost home and auto loans have many Americans already seeking to refinance. It’s important to note that a 0.25% cut in interest, even if its executed three times this year, is NOT worth refinancing for. You’ll need to wait until the rates fall even further for that.
Better Your Credit
The rate cut is a decent deal for those with good credit, but if you have bad credit, you likely won’t see any of the benefits in the rates you are offered for a variety of loans. So right now, instead of buying or financing more, consolidate your debt and look into bettering your credit. By the time you have bumped yourself up several points, it might actually be worth refinancing for a better rate.
Pay Down Your Debt
Above all else, take this time to continue paying down debt. Debt is never a good thing, and unfortunately, an interest rate cut won't make it disappear. Additionally, the predicted rate cuts won’t be enough to truly make a difference, so instead of trying to refinance, just keep paying down your balances. Then, when the Feds really cut the rates in a few years, you will be in a better place to get an interest rate that will actually boost your bottom line.
Overall, macroeconomics is a tricky subject, and not even the best analysts can truly predict how the interest rates will move. That being said, the rate changes we believe are coming and not significant enough to make a change in the life of the average consumer—so don’t quit your day job yet and keep paying down those debts!
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