Fed cuts key interest rate half a point as inflation eases. Will borrowers get a break?

The Federal Reserve cut its key interest rates half a percentage point Wednesday, a strong move that reverses two years of rate increases and giving consumers new hope that borrowing costs will come down.

Its target rate was 5.25% to 5.5%. It will now be in the range of 4.75% to 5%.

While Wednesday’s announcement is unlikely to mean dramatic change in what people pay for mortgage interest, car loans and credit cards right away, it’s likely to be the first step on a path that does drive rates much lower.

“Borrowers are likely going to meet rate cuts with open arms, but borrowing isn’t about to become so inexpensive that people feel obligated to totally change their financial strategies,” said Jacob Channel, senior economist at LendingTree, which tracks interest rates..

“Don’t expect getting a mortgage and buying a house to suddenly become dramatically easier in the immediate future,” he said.

But Fed Chairman Jerome Powell has suggested further cuts are coming, as the Fed tries to keep the increasingly sluggish economy healthy.

The UCLA Anderson forecast has predicted federal funds rates dropping under 5% next year and down to an average of 4.4% in 2026.

The Fed had increased its target rate 11 times starting in March 2022, aiming to ease the rate of inflation. The cost of living rose 9.1% in the 12 months ending in June 2022, the steepest increase in more than 40 years.

Inflation has eased since then and reached an annual rate of 2.5% in the year ending in August. The Fed has sought to reduce the rate to 2%.

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated,” the Fed said in its statement Wednesday.

The higher interest rates tend to ease demand for goods and service, motivating sellers to keep prices stable.

Declining oil prices and slower wage increases make the future inflation outlook “cautiously optimistic,” said Sung Won Sohn, president of SS Economics, a Los Angeles-based economic consulting firm, called the future price outlook “cautiously optimistic.”

As a result, he said, the Fed is “likely to consider further policy adjustments to maintain stability in the face of evolving economic conditions.”

Help for consumers?

Just when consumers will see major cuts in rates is unclear.

Rates for a 30-year mortgage have already fallen, as they tend to be tied to longer range economic projections. Rates peaked at 7.79% 11 months ago and fell to 6.2% last week, according to Freddie Mac, which tracks rates.

In California, the state Realtors Association reported that the July median price was down 1.6% from June to $886,560. That figure, though, was still 6.5% higher than a year earlier, when the median was $832,530.

Sales of existing single family detached homes in California were up in July, and there was optimism about what’s ahead.

“This improvement in lower borrowing costs could motivate homebuyers on the sideline to re-enter the market, especially since home prices began to soften at the tail end of the homebuying season,” said Jordan Levine, the association’s chief economist, in a statement.

The association said in a press release it expects home prices to “soften further in coming months but should continue to register moderate year-over-year growth for the rest of the year.”

The news for credit card holders is not quite as bright..

“This one rate cut isn’t really going to make much of a difference for most people,” said Matt Schulz, credit analyst at LendingTree, of the anticipated Fed cut.

In September, the average rate on a new credit card offer has been 24.92%, the same as in August.

“Barring the Fed unexpectedly stomping on the gas pedal when it comes to lowering rates, credit card APRs (annual percentage rates) are still going to be high for the foreseeable future,” he said.

Schulz did see auto loan rates going down, but said consumers should be seeking the best rate by shopping.

“It is still crucial to shop around for the best available rates and get pre-approved for a loan before you ever head into the dealership because the rates you’d get from the dealer can be far higher than what you can get elsewhere,” he said.

The average monthly car payment on a new car has reached $735 this year.