According to one expert, “this is one of the worst rate-cutting cycles ever for consumers.”
Many people believed that borrowing costs would decrease after the Federal Reserve started lowering its benchmark interest rate in September. Rather, the reverse has occurred.
In fact, mortgage rates have gone up and continue to be a significant obstacle for potential homebuyers. Credit card annual percentage rates, or APRs, have only marginally decreased, and auto loans haven’t changed much, providing no respite to those who have accrued debt to pay for daily expenses.
In the meantime, money-market funds and savings account yields are already declining.
The rate environment is still awful for Americans hoping for a break, some four months after the central bank began removing its short-term rate from a two-decade high.
As stated by Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, “this is one of the worst rate-cutting cycles ever for consumers,” MarketWatch said. “You’re paying more for your borrowing and making less money with your cash. The situation has been a double whammy.
Following a 1-percentage-point cut in the latter months of 2024, the Fed maintained its short-term rate at 4.25% to 4.50% on Wednesday in its first rate decision of 2025.
However, a new survey indicates that many people’s financial well-being will not be affected by the Fed’s decision to hold. According to a recent Morning Consult survey, 62% of participants believe that interest rates are too high. That’s a “modest” decline, according to economist Sofia Baig of Morning Consult, compared to 68% in June.
The economy takes time to absorb the Fed’s policies, and consumers need even more time to notice the difference. Baig stated, “It’s a double lag, basically,”
According to the poll, 82% of millennials think that high interest rates have impacted their household’s finances, compared to 75% of adults overall, indicating that they are more sensitive to fluctuations in interest rates. According to Baig, members of this group are more likely than other generations to witness the most recent financing costs up close because they are in their prime years of spending on homes, vehicles, and children.
“They are just more in the time of their life to be taking on debt,” she explained. This renders them “more exposed to the whims of interest rates.”
Although millennials may be the most affected by interest-rate pressures, the study found that other age groups were also experiencing hardship, highlighting the disconnect between people’s perceptions of their money and favorable macroeconomic metrics.
Prices for essential products and services are still high when compared to pre-pandemic levels, which contributes to the consumer disconnect. Additionally, consumer loan interest rates do not rise in lockstep with the Fed’s effective federal-funds rate, although short-term yields, such as savings account interest rates, do.
For example, longer-term Treasurys are linked to mortgages and auto loans. The 10-year Treasury yield, BX:TMUBMUSD10Y, rose from 3.715% in mid-September to 4.533% on Wednesday due to the economy’s continued strength.
“The tough part for consumers [hoping for lower borrowing costs] is it might take a slowing economy to bring yields down,” Carlson stated. “It’s a Catch-22.” He went on to say that the best most customers can aspire for is for their employers to succeed so they may get paid more.
The Fed is likely to keep interest rates unchanged this week, according to Elizabeth Renter, senior economist for the personal finance website NerdWallet (NRDS). “For consumers and business owners, this means higher borrowing costs are largely here to stay, for the time being,” she stated.
There won’t be any significant rate changes for homebuyers in 2025.
All efforts to purchase a home have been hampered by the Fed’s rate reduction, which haven’t done much to lower mortgage rates.
After the Fed started tightening monetary policy to fight inflation, the 30-year mortgage rate first spiked to 7% in the second half of 2022. Despite the Fed’s retreat, rates have mostly remained near 7% since then.
Last year, there was a brief and minor relief for buyers as the 30-year rate dropped sharply and approached 6% in September, which increased home sales and refinances.
Since then, as the financial markets attempt to gauge the potential effects of President Donald Trump’s policies on inflation and the Fed’s future interest-rate plans, the 30-year fixed rate has risen back up to 7%. It is anticipated that there will be minimal movement in the 30-year mortgage rate throughout 2025.
According to a recent prediction made by the massive housing financing company Fannie Mae (FNMA), the average 30-year mortgage rate is expected to conclude 2025 at 6.5% and 2026 at 6.3%.
Overall, “the 2025 housing market is shaping up to feel a lot like 2024,” according to a statement from Fannie Mae chief economist Mark Palim.
It follows that the majority of homebuyers believe the Fed’s rate decreases have had little effect on their lives. According to a recent NerdWallet survey, about 70% of Americans believe that the current state of the housing market is the worst it has ever been for buyers.
Due to ultralow fixed-rate mortgages, the majority of U.S. homeowners who are not looking to buy have probably been immune to the Fed’s rate decreases, unlike homeowners in other areas of the world.
For example, the majority of homeowners in nations like Australia have variable-rate mortgages, meaning that when their central bank raises interest rates, so do their rates.
The Reserve Bank of Australia’s graphic below illustrates how largely immune American homeowners are to changes in mortgage rates.
Additionally noteworthy is the percentage of homeowners with ultralow rates, many of whom obtained them during the pandemic. According to a Realtor.com examination of federal government data, 73% of homeowners with an outstanding mortgage have an interest rate below 5%. That is significantly less than the current 7%. Move Inc., a subsidiary of News Corp., runs Realtor.com. Dow Jones, the publisher of MarketWatch, is a division of News Corp.
According to the National Association of Realtors, millennials, who make up the greatest portion of house buyers, have been most hurt by consistently high mortgage rates.
The average first-time homebuyer in the 1980s was in their late 20s. According to the NAR, they are now 38 years old, which is the oldest average age ever recorded.
According to data from the car-buying website Edmunds, the average interest rate on new cars dropped from 7.4% a year earlier to 6.8% in the fourth quarter of 2024, when the Fed first began lowering rates. During that period, the average rate for used autos dropped from 11.6% to 11%.
New automobile buyers had higher average monthly payments because they were borrowing more money, even if borrowing costs were lower and car prices were slightly lower. In the fourth quarter, their average monthly payments were $754, up from $739 in the same quarter of 2023.
In contrast, Edmunds reports that the average payment for used car buyers decreased by $28 to $533.
According to Edmunds’ consumer-insights researcher Joseph Yoon, “it’s not like the price of vehicles is improving dramatically,” with MarketWatch. In 2024, the average selling price of cars stayed high, at $27,252 for used cars and $47,465 for new cars. “We’re still a long way from anything good happening for the consumer.”
APRs on credit cards are lower. What the heck?
According to LendingTree (TREE), after hitting record highs earlier in 2024, APRs for new card offers have gradually decreased, averaging 24.26% in January from 24.43% in December. That is only a 17 basis point drop. (One tenth of a percentage point is called a basis point.)
According to the Fed, the average rate on a card with a balance decreased from 23.37% in the third quarter to 22.80% in November.
The prime rate, which is typically three percentage points higher than the Fed’s rate, is the basis for credit card lending rates. For a bigger margin, banks usually add additional 12 or 13 percentage points, and then there are the specific factors based on a borrower’s credit score.
According to experts, it typically takes one or two months for a change in the Fed’s interest rate to affect the annual percentage rate on a credit card. According to Luke Sotir of Equitable Advisors, however, credit-card APR margins are already so large that a few reductions in the Fed’s rate and the associated prime rate won’t have a significant impact.
Furthermore, a modestly lower APR could not result in significant savings because credit card balances have gotten so big. According to TransUnion, the average debt load for those with a balance in the third quarter was close to $6,400.
Money-market fund and savings account rates are already declining.
According to data from the Federal Deposit Insurance Corporation, the average percentage interest on savings accounts nationwide has decreased from 1.22% to 1.16% in the past year. Although there are still high-yield savings accounts that pay more than 4% APY, the arrow is moving downward in the category of high-yield accounts that will pay higher interest on deposits than megabanks.
According to the Morning Consult study, the majority of respondents (17%) observed a drop in interest rates in their savings account. According to Baig, “it’s one of the more visible rates,” along with mortgage rates.
However, according to Sotir, the range of deposit-account APYs is significantly greater than that of mortgages. Savings and CDs are areas where people have more influence, even though many rates may seem to be stagnant or heading in the wrong direction—as long as they are cautious with their money and are prepared to compare rates.
“If you don’t pay attention and are happy to take the lower interest rate, the bank is happy to give the lower interest rate for deposits,” Sotir stated.
