What Fed Rate Cut? Most Americans Say They Haven’t Felt the Impact of the Central Bank’s Policies
Why This Rate-Cutting Cycle Isn’t Easing the Financial Pain for Many Consumers
After the Federal Reserve initiated a series of rate cuts starting in September 2024, many consumers anticipated lower borrowing costs. Unfortunately for them, the reality has been quite the opposite. Instead of decreasing, mortgage rates soared and have since presented a formidable barrier for potential home buyers. Car loans have only marginally decreased, and credit card annual percentage rates (APRs) have seen slightly lower rates but no substantial relief for those grappling with significant debt. Simultaneously, the interest yields on savings accounts and money market funds have been diminishing, worsening the financial landscape for many Americans seeking a reprieve.
Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management, remarked, “This is one of the worst rate-cutting cycles ever for consumers.” He emphasized the double impact: earning less on cash savings while incurring higher borrowing costs.
Despite the Fed’s recent decision to maintain its short-term interest rate between 4.25% and 4.50%, many people still feel unaffected by these policy changes. A recent Morning Consult survey revealed that 62% of respondents believe interest rates are excessively high, reflecting a minor improvement from 68% in June but still indicating widespread dissatisfaction. **Sofia Baig**, an economist at Morning Consult, noted that there is a “double lag” in how Fed decisions impact the economy, and even more time is required for consumers to experience the changes.
Millennials Hit Hardest by Rate Pressures
The survey highlighted that millennials are particularly susceptible to fluctuations in interest rates, with 82% indicating that high rates negatively impact their household finances. Younger generations are more likely to incur debt as they make essential purchases concerning families, homes, and cars, making them susceptible to the ongoing volatility in borrowing costs.
Millennials’ distress isn’t exclusive; other age groups are also feeling financial strain. They face a significant gap between optimistic macroeconomic indicators and their financial realities. Basic goods and services continue to rise in price compared to pre-pandemic levels, compounding the financial struggle. Although short-term interest rates, such as those on savings accounts, adjust alongside the Fed’s rates, longer-term loans like mortgages and auto loans are not tied to these movements. Instead, they are more closely linked to the yields on longer-term Treasury bonds, which have recently seen an uptick, exacerbating the burdens on consumers.
Carlson commented, “The tough part for consumers hoping for lower borrowing costs is it might take a slowing economy to bring yields down. It’s a Catch-22.” He said the best hope for consumers lies in their employers’ performance leading to wage increases.
Home Buyers Facing Challenges
The Fed’s rate cuts have failed to bring down mortgage rates, leading to a significant slowdown in home-buying activities. The 30-year mortgage rate initially hit 7% in late 2022, following aggressive tightening of monetary policy by the Fed to combat inflation. Although there was a temporary dip to around 6% last September, rates escalated back to approximately 7%, hindering prospective home buyers’ plans.
Forecasts for the 30-year mortgage rate suggest minimal change for 2025, with the Fannie Mae estimate predicting an average rate of 6.5% by the end of 2025 and further decreasing to 6.3% in 2026. With ongoing high interest rates, approximately 70% of Americans feel the housing market is at its lowest point for buyers, as highlighted by a recent NerdWallet survey. Unlike homeowners in various global markets that face variable-rate mortgages, many U.S. homeowners are largely insulated from fluctuating rates due to securing ultralow fixed-rate mortgages during the pandemic.
Auto Loans and Credit Card Rates Stay High
In the automotive sector, while the average interest rate on new cars saw a decline to 6.8%, the sky-high prices of vehicles remain problematic. New car buyers continue to experience increased monthly payments, averaging $754 in the fourth quarter of 2024, up from $739 a year earlier. Conversely, average monthly payments for used car buyers decreased slightly but still reflect elevated financial burdens.
In terms of credit, although APRs for new card offers have dipped modestly to an average of 24.26%, it represents only a slight shift with minimal impact on consumers deeply in debt. Credit card balances have increased significantly, with borrowers averaging a debt of nearly $6,400 in the third quarter of 2024.
Savings Accounts and Consumer Control
Consumers are further inconvenienced by falling savings account yields. As of now, the national average for savings accounts has declined to 1.16%, down from 1.22% last year. Though some high-yield accounts may still offer competitive rates, a majority of consumers might not reap the benefits unless they shop around.
“Consumers have more control over their deposits by being proactive,” noted Luke Sotir of Equitable Advisors. He emphasized the importance of vigilance to avoid being settled into lower interest rates without exploring better options available in the market.
Conclusion
The Fed’s rate cuts, meant to stimulate the economy and ease borrowing costs, have instead created a compounded challenge for consumers grappling with high rates, rising prices, and stagnant wages. With millennials feeling the brunt of these changes in their critical spending phases, the disconnect between macroeconomic indicators and consumer experiences raises concerns about the effectiveness of the Fed’s current policies. The hope remains—despite the challenges—that future economic growth may bring at least some relief.