What would a lower Fed rate mean for spenders and savers?

With inflation continuing to track toward the Federal Reserve’s 2% target and the job market slowing, there’s a wide consensus among economists and investors that the Fed will begin cutting interest rates at their meeting in mid-September. Analysts anticipate rate cuts again in November and December — for a predicted total cut of 75 basis points by the end of the year. 

We’ve gotten used to “higher for longer” interest rates from the Fed, so what will “gradually moving lower for a while” mean for the economy and consumers?

As the Fed has signaled the direction of interest rates to the market, investors have responded, per Wilmington Trust economist Luke Tilley. 

“We’ve already started to see a lot of interest rates move down, because it’s become very clear that the Fed is going to be embarking on a rate-cut cycle,” he said.

The average 30-year mortgage rate has now fallen below 6.5% for the first time since spring 2023.

And when the Fed starts cutting the rate it sets directly for overnight loans between banks, “we will see credit card rates moving down in lock step,” said Mark Hamrick at Bankrate.

But Hamrick points out that, with credit card interest averaging above 20% and consumer debt at record highs, “I don’t think this is going to be, you know, people dancing in the streets because of lower borrowing costs,” he said. “It’s merely going to be somewhat of a reprieve from the pain.”

Meanwhile, savers will be outright losers — earning less as banks follow the Fed’s lead and cut the interest paid on deposits.