The Federal Reserve is expected to lower borrowing costs again on Wednesday.
Another quarter-point reduction, on the heels of September’s cut, would bring the federal funds rate to a range between 3.75%-4.00%.
The federal funds rate, which is set by the Federal Open Market Committee, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves do have a trickle-down effect on many types of consumer loans.
The FOMC has also set expectations for another reduction in December, but after that, the path is unclear. President Donald Trump — who has said a pick to replace current Federal Reserve Chair Jerome Powell could come by the end of the year — has repeatedly weighed in on Fed policy, arguing that rates should be sharply lower.
It’s not a given that rates will continue to fall, and even if they do, not all consumer products are affected equally.
‘The Fed is not cutting every single interest rate’
When the Fed hiked rates in 2022 and 2023, the interest rates on most consumer loans quickly followed suit. Even though this would be the second rate cut in a row, many of those consumer rates are likely to stay higher, for now.
“The Fed is not cutting every single interest rate that exists in the world,” said Mike Pugliese, senior economist at Wells Fargo Economics.
Depending on their duration, some borrowing rates are more sensitive to Fed changes than others, he said: “At one end of the spectrum, you have shorter floating rates, and on the other end, you have a 30-year fixed rate mortgage.”
Those shorter-term rates are more closely pegged to the prime rate, which is the rate that banks extend to their most creditworthy customers — typically 3 percentage points higher than the federal funds rate. Longer-term rates are also influenced by inflation and other economic factors.
Credit cards won’t ‘go from awful to amazing overnight’
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According to Bankrate, nearly half of American households have credit card debt and pay more than 20% in interest, on average, on their revolving balances — making credit cards one of the most expensive ways to borrow money.
Since most credit cards have a short-term, variable rate, there’s a direct connection to the Fed’s benchmark.
When the Fed lowers rates, the prime rate comes down, too, and the interest rate on your credit card debt is likely to adjust within a billing cycle or two. But even then, credit card APRs will only ease off extremely high levels. And generally, card issuers have kept their rates somewhat elevated to mitigate their exposure to riskier borrowers.
“Even if the Fed steps on the gas in the coming months when it comes to rate cuts, credit card rates aren’t going to go from awful to amazing overnight,” said Matt Schulz, LendingTree’s chief credit analyst.
For example, if you have $7,000 in credit card debt on a card with a 24.19% interest rate and pay $250 per month on that balance, lowering the APR by a quarter-point will save you about $61 over the lifetime of the loan, according to Schulz.
Slight benefit for car and home buyers
Although auto loan rates are fixed for the life of the loan, experts say potential car shoppers could benefit if borrowing costs come down in the future.
The average rate on a five-year new car loan is currently around 7%. Going forward, “a modest Fed rate cut won’t dramatically slash monthly payments for consumers,” Jessica Caldwell, head of insights at Edmunds, previously told CNBC, “but it does boost overall buyer sentiment.”
Longer-term loans, like mortgages, are less impacted by the Fed. Both 15- and 30-year mortgage rates are more closely tied to Treasury yields and the economy.
Still, expectations of more cuts down the road could put some downward pressure on mortgage rates, experts say, and that may “spur more Americans to consider jumping back into the housing market after sitting on the sidelines for so long,” according to LendingTree’s Schulz.
Other home loans are more closely tied to the Fed’s moves. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away.
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