5 top money moves to consider before the Federal Reserve's first rate cut since 2020

Last week, Federal Reserve Chair Jerome Powell all but confirmed that an interest rate cut is coming soon.

“The time has come for policy to adjust,” the central bank leader said in his keynote address at the Fed’s annual retreat in Jackson Hole, Wyoming.

For Americans struggling to keep up with sky-high interest charges, a likely quarter-point cut in September may bring some welcome relief — especially with the right preparation. (A more aggressive half-point move has a roughly a 1-in-3 chance of happening, according to the CME’s FedWatch measure of futures market pricing.)

“If you are a consumer, now is the time to say: ‘What does my spending look like? Where would my money grow the most and what options do I have?'” said Leslie Tayne, an attorney specializing in debt relief at Tayne Law in New York and author of “Life & Debt.

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Currently, the federal funds rate is at the highest level in two decades, in a range of 5.25% to 5.50%.

If the Fed cuts rates in September, as expected, it would mark the first time officials lowered its benchmark in more than four years, when they slashed them to near zero at the beginning of the Covid-19 pandemic.

“From a consumer perspective, it’s important to note that lower interest rates will be a gradual process,” said Ted Rossman, senior industry analyst at Bankrate.com. “The trip down is likely to be much slower than the series of interest rate hikes which quickly pushed the federal funds rate higher by 5.25 percentage points in 2022 and 2023.”

Here are five ways to prepare for this policy shift:

With a rate cut, the prime rate lowers, too, and the interest rates on variable-rate debt — most notably credit cards — are likely to follow, reducing your monthly payments. But even then, APRs will only ease off extremely high levels.

For example, the average interest rate on a new credit card today is nearly 25%, according to LendingTree data. At that rate, if you pay $250 per month on a card with a $5,000 balance, it will cost you more than $1,500 in interest and take 27 months to pay off.

If the central bank cuts rates by a quarter point, you’ll save $21 altogether and be able to pay off the balance one month faster. “That’s not nothing, but it is far less than what you could save with a 0% balance transfer credit card,” said Matt Schulz, chief credit analyst at LendingTree.

Rather than wait for a small adjustment in the months ahead, borrowers could switch now to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a lower-rate personal loan, Tayne said.

Since rates on online savings accounts, money market accounts and certificates of deposit are all poised to go down, experts say this is the time to lock in some of the highest returns in decades.

For now, top-yielding online savings accounts are paying more than 5% — well above the rate of inflation.

Although those rates will fall once the central bank lowers its benchmark, a typical saver with about $8,000 in a checking or savings account could earn an additional $200 a year by moving that money into a high-yield account that earns an interest rate of 2.5% or more, according to a recent survey by Santander Bank in June. The majority of Americans keep their savings in traditional accounts, Santander found, which FDIC data shows are currently paying 0.46%, on average.

Alternatively, “now is a great time to lock in the most competitive CD yields at a level that is well ahead of targeted inflation,” said Greg McBride, Bankrate’s chief financial analyst. “There is no sense in holding out for better returns later.”

Currently, a top-yielding one-year CD pays more than 5.3%, according to Bankrate, as good as a high-yield savings account.

If you’re planning a major purchase, like a home or car, then it may pay to wait, since lower interest rates could reduce the cost of financing down the road.

“Timing your purchase to coincide with lower rates can save money over the life of the loan,” Tayne said.

Although mortgage rates are fixed and tied to Treasury yields and the economy, they’ve already started to come down from recent highs, largely due to the prospect of a Fed-induced economic slowdown. The average rate for a 30-year, fixed-rate mortgage is now just under 6.5%, according to Freddie Mac.

Compared with a recent high of 7.22% in May, today’s lower rate on a $350,000 loan would result in a savings of $171 a month, or $2,052 a year and $61,560 over the lifetime of the loan, according to calculations by Jacob Channel, senior economic analyst at LendingTree.

However, going forward, lower mortgage rates could also boost homebuying demand, which would push prices higher, McBride said. “If lower mortgage rates lead to a surge in prices, that’s going to offset the affordability benefit for would-be buyers.”

What exactly will happen in the housing market “is up in the air” depending on how much mortgage rates decline in the latter half of the year and the level of supply, according to Channel.

“Timing the market is virtually impossible,” he said. 

For those struggling with existing debt, there may be more options for refinancing once rates drop.

Private student loans, for example, tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means once the Fed starts cutting interest rates, the rates on those private student loans will come down as well.

Eventually, borrowers with existing variable-rate private student loans may also be able to refinance into a less-expensive fixed-rate loan, according to higher education expert Mark Kantrowitz. 

Currently, the fixed rates on a private refinance are as low as 5% and as high as 11%, he said.

However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he added, “such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.” Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.

Be mindful of potential loan-term extensions, cautioned David Peters, founder of Peters Professional Education in Richmond, Virginia. “Consider maintaining your original payment after refinancing to shave as much principal off as possible without changing your out-of-pocket cash flow,” he said.

Similar considerations may also apply for home and auto loan refinancing opportunities, depending in part on your existing rate.

Those with better credit could already qualify for a lower interest rate.

When it comes to auto loans, for instance, there’s no question inflation has hit financing costs — and vehicle prices — hard. The average rate on a five-year new car loan is now nearly 8%, according to Bankrate.

But in this case, “the financing is one variable, and it’s frankly one of the smaller variables,” McBride said. For example, a reduction of a quarter percentage point in rates on a $35,000, five-year loan is $4 a month, he calculated.

Here, and in many other situations, as well, consumers would benefit more from paying down revolving debt and improving their credit scores, which could pave the way to even better loan terms, McBride said.