The likelihood of the Fed lowering interest rates is welcome news to millions of Americans who’ve endured several years of rising inflation and borrowing costs. The media has reported on the hardship posed by higher interest rates, but much of the coverage has centered around banks or tech companies. In my opinion, there’s been too little emphasis on the middle-income folks who’ve been forced to make ends meet by spending down their savings and charging essential items on high-rate credit cards. Many of them are facing sky-high mortgage and auto loan payments that eat up most of their monthly budget.
Is it any wonder people were thrilled to hear that interest rates would start to decline in 2024? For most of us, the change can’t happen fast enough. I’m someone who sees better times ahead, but I’m not chilling the champagne and preparing for a celebration just yet. That’s because I think the rate cuts will be modest and probably won’t begin until the second or third quarter after the Fed is confident inflation is cooling.
Here’s what I think will happen rate-wise.
Mortgage rates
Mortgage rates started to fall at the end of 2023. Freddie Mac, Fannie Mae, and The Mortgage Bankers Association all expect moderate declines this year and predict 30-year fixed rates of 6 to 7%. That’s high with respect to the dramatic lows of a few years ago, but not out of line historically.
A modest decrease could be enough to encourage some buyers on the sidelines to jump into the market. I anticipate a more robust spring real estate market with more opportunities for retirees to sell their current homes and downsize.
Auto loans
If you’ve been waiting to finance a car, you may be motivated to make your move this year. Rates of 9 to 10% on new car loans that prevailed in 2023 have already started to moderate. The extent of the decline is unpredictable at this point, but factors other than interest rates are contributing to greater affordability. The auto industry is experiencing supply chain improvements and inventory increases that could lead to more incentives and discounts, including special financing deals.
Personally, I’m not a fan of buying brand new vehicles or financing car purchases. To my way of thinking, it makes better financial sense to pay cash, if possible, or borrow for a moderately priced used car in good condition and keep it for as long as possible.
This statistic from Edmunds proves my point: In 2023, monthly payments for car loans averaged $734 for a duration of 69 months. I can think of better ways to spend money.
Car purchases every 2-3 years are probably the most wasteful thing that most families do over their working lives.
Credit Cards
The combination of high inflation and high interest rate costs is tough for the average American but it’s a real bonanza for credit card companies. Today, we’re paying roughly 21% interest on revolving balances–that’s up from 16.34% in 2022 according to Bankrate. With Fed action, I expect rates to drop only modestly to about 20%.
Savings Accounts
I think current yields on savings and money market accounts and CDs are near the top and about as good as they’re going to get. Online banks will probably be offering high yield accounts in the 4 to 5% range this year. That’s a little lower than 2023 but quite good when you consider inflation is diminishing. It seems we’ve turned the corner on that decade-long stretch of historically low yields. Good-bye 1%!
Smart Money Moves to Make Now
Pay off credit card debt. At the very minimum, pay the amount due by the due date so you don’t face penalties and even higher rates. If you’re in over your head, don’t hesitate to seek credit counseling.
Avoid taking on debt for discretionary purchases and items unlikely to appreciate. For example, if you don’t need to purchase a car immediately, delay it until rates come down further. Mortgages are a different matter for two reasons: A home is generally an appreciating asset, and the loan can be refinanced in the future when rates decrease.
Build an emergency fund. Everyone needs a rainy-day account to see them through an unforeseen situation or emergency. Try to keep 3-to-6 months’ worth of living expenses in a liquid account you can get your hands on in a hurry.
Shop for the high interest rates on your savings. Don’t settle for low yields on your savings and consider a high-yield account from an online financial institution. According to the July 2023 issue of Money, as many as 70% of middle-income earners hadn’t moved money into a higher yielding account and were missing out on better rates. Always have disability insurance. For most Americans their biggest asset is their ability to earn an income.