On Wednesday, the United States’ Federal Reserve announced that it was cutting its benchmark interest rate by 0.5%, an unusually large reduction.
The reason for this substantial cut can be chalked up to milder inflation projections that make the central bank confident that it can shrink the costs of borrowing money. This move is expected to give many Houstonians more flexibility navigating debt, mortgages and auto loans.
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As the reduction announcement was made, KPRC 2′s Michael Horton spoke with entrepreneur and financial expert Mark Madrid, who serves as CEO of Breakthrough Mavens, LLC.
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Impacts of the cuts
Madrid said the cuts will impact people in six major areas: mortgage rates for homebuyers, auto loans, credit cards, savings, the stock market and the job market.
Then, Madrid detailed how the cut could provide new opportunities for young families looking to purchase their first homes.
“Imagine a young couple looking to buy their first home, right?” Madrid said. “A rate cut might make their monthly mortgage payments more manageable, allowing them to enter the housing market with greater ease. So literally, this has been a drawback preventing folks from buying their first home. For those who have been struggling with higher interest rates, their mortgage payments, they have a chance to potentially refinance to give them more relief.”
Similarly to mortgage implications, auto loan rates are also influenced by interest rates, meaning that this cut has the potential to make buying a new or used car more affordable for many people in the working class. People with current car loans could also have the chance to refinance their loans.
The changes are also projected to encourage consumer spending and lower annual percentage rates, which is an outcome that bodes well for the middle class.
“To be able to have a low APR—if you’re eligible for that under your credit card terms—means more relief, and less [money] going to interest,” Madrid said.
Although the cuts have offered flexibility for those with loans and mortgages, they could spell trouble for your savings.
While borrowers benefit from lower rates, savers might also deal with reduced returns on their savings accounts. This could particularly impact the financial security of retirees who are relying on interest from their savings.
“Banks typically adjust interest rates on savings accounts in response to changes in federal funds rates, and especially if there’s a cut,” Madrid said. “So, in other words, as you have a CD or a savings account, that percentage rate will probably come down.”
How these cuts could help Houstonians
For the average Houstonian, Mark sees this as a step in the right direction. He said he spoke to a small business owner in Houston this morning, and she echoed that sentiment, saying that the cuts give her more flexibility and less stress.
“[The business owner] said, ‘You know, it means more money in my pocket, and that’s what I desperately need right now.’ We are needing capital access, but we also need management of our household, you know, our assets, the running of the operations,” Madrid said.
“So, this this is not necessarily going to mean that the food on the table that the prices decrease, but it will have this effect on interest rates, which affects every part of our lives. It affects where we live, what we drive. It affects what we’re pulling back and what we’re outlaying in terms of cash.” he continued.
So... Now what?
So now that we’ve heard how these cuts can impact particular elements of Houstonians’ lives, where should we go from here? Mark says that the answer lies in the perspective that you have navigating the situation.
“So I think this is where you become like an Amazon shopper, right? If we know that we want a certain product, and we go out and we see what the choices are, and we assess what’s sponsored and not what our price point is, or we look at the reviews I want to submit for the consideration of public. Keep your eyes and all senses open to opportunities, and you have now more leverage to choose potentially between lending choices.”
Mark said one easy way that you can make sure you’re taking advantage of the cut is to be proactive and communicative with your credit card companies.
“On all those parameters that I mentioned—it could be homeownership, it could be refinancing your mortgage, it could be refinancing your car loan, or the purchase of a new or used car—these could be decisions related to savings and it could be a decision on what are your credit card offers, because there might be offers and some of that that have to be self-initiated. So, I also want to put that out in the public’s core: If you don’t see any activity from your credit card, call the credit cards and say, how is this going to affect my rate and, you know, give me more options. I just want to make sure that we empower the public during this time period so that they can feel the relief that this is supposed to generate,” Madrid said.