Retired? Winners and Losers of the Fed’s Interest Rate Cut

• Credit cards: Credit card annual percentage rates have been hovering near record highs, with the average APR on new credit cards clocking in at 24.35 percent in August, according to LendingTree. Rates should fall within a month or two in response to the Fed rate cut, says Matt Schulz, chief consumer finance analyst at LendingTree and author of Ask Questions, Save Money, Make More. 

“The best news for cardholders is that when credit card rates fall because of the Fed, they fall for current balances as well as for new purchases,” he says.

• HELOCs: APRs on home equity lines of credit — which currently range, on average, from 8.22 percent to 9.44 percent, depending on the loan amount — should fall soon in response to the rate cut, Schulz says. Homeowners with variable-rate HELOCs will likely see a drop in their rates, too.
• Auto loans: Car shoppers could see a small drop in auto loan rates, which, on average, are 7 percent for new cars and 10.7 percent for used cars. “However, for most vehicle owners, it will take more than one small rate cut to make refinancing worth their time,” Schulz says.
• Personal loans: Rates for personal loans, which currently average 12.37 percent, should drop slightly, benefiting new borrowers. Borrowers with existing fixed-rate personal loans won’t see a change to their rate unless they refinance.
• Mortgages: The Fed’s decision to cut interest rates won’t have much of an impact on mortgage rates, which recently averaged 6.5 percent for a 30-year loan and 5.6 percent for a 15-year mortgage, according to Freddie Mac. Mortgage rates are tied more closely to the yield for 10-year Treasury bonds, which has been slightly above 4 percent, and the Fed’s openness to cut its benchmark rate has already been priced in, Leguizamón says.  

Investors

Depending on the types of investments you have, your portfolio could benefit from the Fed’s rate cut.

Prices of existing bonds tend to rise when interest rates fall, which helps bond fund holders, says Christine Benz, director of personal finance and retirement planning for Morningstar and author of How to Retire. Newly issued bonds, however, will have lower yields due to a rate cut. 

“If you are someone who buys individual bonds and holds them to maturity, the fact that interest rates are lower will mean that you will earn less on those fixed-income holdings,” Benz says.

Stocks usually perform well too, as rate cuts spur economic recovery and growth. Stocks also become more appealing to investors as yields on safer investments, like savings accounts and money-market funds, fall in response to rate cuts (see below). But allocating too much of your portfolio to stocks can be risky for retirees, Benz cautions.

“I think it makes sense for retirees to have anywhere from five to 10 years’ worth of planned portfolio spending in safer assets — a combination of cash and high-quality bonds,” Benz says. “The basic idea with that setup is that you’re protecting yourself against an extended downturn in the stock market.”

Losers

Savers​

A rate cut can be bad news for retirees with a lot of cash sitting in savings accounts, money-market funds or short-term certificates of deposit (CDs). Yields on these accounts will drop. What makes matters worse is a relatively high inflation rate of 2.9 percent.

“In the past, rate cuts occurred when inflation was low,” Chen says. “Now it’s different. With inflation potentially rising, the real rate [on savings accounts] is going to be even lower. That could hurt retirees.” Moreover, inflation will likely eat into the lower rates on savings accounts and leave retirees with less purchasing power.

That doesn’t mean you should pull all of your money out of savings, but it is a good time to make sure you have a portfolio allocation that makes sense for your age and risk tolerance. “Protecting yourself against a big stock market shock is the greater mission in this case than picking up every basis point of yield that you can,” Benz says.

Still, advisers say you should seek the best possible returns on any cash accounts you have. While the annual percentage yield (APY) on savings accounts averages 0.61 percent, some accounts are paying more than 4 percent, according to Bankrate.

Looking ahead

The Fed has two more opportunities to adjust rates this year, at its regularly scheduled meetings on Oct. 28-29 and Dec. 9-10. But Leguizamón says it is hard to predict whether more cuts are coming.  

The Fed has a dual mandate to achieve maximum employment and keep inflation low. It might continue to lower rates if the U.S. economy keeps adding fewer jobs and unemployment rises. However, a weaker job market might be accompanied by inflation from tariffs, which would likely make the Fed’s committee less inclined to cut rates. 

“Since it is hard to know how many tariffs will remain in place and which may be scrapped, the Fed will probably continue to take things slowly and make decisions one day at a time, as it has been doing so far,” Leguizamón says.