Retired? Winners and Losers of the Fed's Latest Rate Cut

Looking to buy a car? New and used auto loan rates haven’t come down yet but are expected to. In the second quarter of 2024, the overall average auto loan interest rate was 6.84 percent for new cars and 12.01 percent for used cars. If you have a car loan with a high interest rate, refinancing could be an option, but rates are still elevated, so it might be wise to wait.

Investors

Cash has been king in recent months, thanks to elevated rates, but in a lower-inflation environment, stocks tend to perform better, since companies benefit from reduced borrowing costs. In a recent study of 14 rate cuts, Charles Schwab found that the S&P 500 posted positive returns 12 months after the rate cut 86 percent of the time. 

The study noted that defensive sectors — those that are more resistant to economic swings, such as health care and utilities — tended to underperform when interest rates ticked down. Cyclical stocks such as consumer discretionary and industrials, which benefit when the economy is growing, have more potential in a declining rate environment.

The key takeaway: Carve out time to review your investment portfolio or seek help from a trusted adviser. If you still have money in a 401(k), your plan sponsor can help, sometimes for free. “It’s been so easy to put money in cash and earn 5 percent,” Blanchett says. “You don’t want to think, I’ll revisit this in six months or a year, and have rates drop dramatically and be stuck with your cash yielding next to nothing.”

Losers

Savers​

With the Fed issuing a series of rate hikes since 2022, savers have been on the receiving end of higher returns, with high-yield savings accounts and certificates of deposit (CDs) yielding over 5 percent interest. That’s been quite a boon after decades of paltry returns. But when the Fed cuts rates, those returns diminish, which can have a particularly big impact on retirees who are living on a fixed income and regularly withdrawing money from savings accounts to pay their bills.

“Retirees on average have some savings and Social Security,” says Jeffrey Bergstrand, a professor of finance at the Mendoza College of Business at the University of Notre Dame and a former economist at the Federal Reserve Bank of Boston. “If I’m a retiree and I hold a money market account earning half of a point less annually, that is a significant amount. So the responses of the retiree whose income is going down are to spend less, which is difficult, or look at alternative investments, which could be bonds or stocks.”

These diminishing returns are likely to get worse in the months to come. Policymakers predict another two rate cuts in 2025, at 0.25-percentage points apiece.  

If your money is parked in a savings account, CD or money market account and you foresee a shortfall, cutting your discretionary spending could help. Getting a part-time job can also generate some extra income. 

The silver lining: Savings account rates aren’t going to fall off a cliff tomorrow. So don’t cash out your accounts and stick the money under a mattress.

Now may also be a good time to consider stocks or bonds, which tend to perform well when the Fed reduces rates. “You don’t want to wait until the music stops playing to make a move,” says David Blanchett, head of retirement research at the investment firm PGIM DC Solutions. “I think core bonds could make a lot of sense. When interest rates fall, prices of bonds rise. There could be an increased return in the near future.”

Fraud victims

Retirees are a big target for scammers, who try to trick older adults into giving money or sharing sensitive information like passwords and bank account numbers. Fraud targeting retirees could tick up in the coming months, Collinson warns. “Retirees need to be hyper, hyper vigilant about potential scammers,” she says. “Whenever there’s a major shift in the marketplace, it is an invitation for scammers to attempt to exploit it.” 

Be wary if you receive investment or refinancing offers that sound too good to be true, says Collinson. One key way to avoid being victimized: Don't engage. You are under no obligation to respond to calls, emails or texts from strangers.

If you get a call from a number you don't recognize, let it go to voicemail. If you have an iPhone, you can automate this: Add the phone numbers for your family, friends, doctors and other important people to the Contacts app, then go to Settings, Apps and, in the Phone app, turn on Silence Unknown Callers. This will send any caller who isn’t in your contact list directly to voicemail.

If an unknown caller does get through, err on the safe side and tell them that you don’t do business over the phone, then hang up. If they claim to be from your bank, credit card issuer, utility provider or some other company you do business with, hang up and call the company directly, using a customer service line you know to be legitimate, and ask if they are trying to get in touch with you.

Credit card holders

Given how high credit card interest rates are — around 20 percent on average — the Fed’s recent rate cut isn’t going to make much of an impact. Banks and credit card issuers are quick to raise rates but slower to reduce them. It will likely take more rate cuts to see a meaningful impact. Focus on paying down any credit card debt you are carrying and consider transferring it to a balance transfer card with a lower interest rate.