The size of the Fed’s interest-rate cut doesn’t matter as much for your wallet as this other key decision
Investors expected the Fed to decide between a 25- and 50-basis-point rate cut Wednesday. But the impact of a smaller cut versus a larger one on something like your credit-card bill is pretty minuscule. - Getty Images/iStockphoto
On Main Street, however, the size of the Fed’s rate cut won’t make that much of a difference — at least at first.
Major stock indexes jumped after the Fed’s initial announcement — with the S&P 500 SPX briefly reaching an all-time high — before edging lower in the final hour of trading.
But what does an initial Fed rate cut translate to for the average American and their credit-card bill? “Maybe a couple of bucks a month,” said Matt Schulz, chief credit analyst at LendingTree TREE.
The bottom line: “It’s not going to dramatically impact cardholders’ lives immediately,” he said. There’s a different aspect of the Fed’s approach that will make the biggest impact, experts added.
It typically takes one or two billing cycles for a credit card’s annual percentage rate to drop after a rate decrease, Schulz and others note.
And the impact of a smaller cut versus a larger one on something like your credit-card bill is pretty minuscule. Here’s how the math breaks down: The average American household owes about $6,065 on their credit cards, according to Fed estimates.
With the current average annual percentage rate of 22.76%, they’re looking at a monthly interest payment of about $113.50.
If that APR falls by 50 basis points, they would still be looking at about $111 in monthly interest.
If that average rate had fallen by 25 basis points — investors expected the Fed to decide between a 25- and 50-basis-point cut Wednesday — their monthly payment would shrink to $112.21, about $1.25 less than they’re paying now.
And even that might be overstating it, said Olu Sonola, head of U.S. economic research at Fitch Ratings. Credit-card debt burdens are rising, which might offset falling interest charges.
“For the consumer to get some real relief, we’re going to need to see a series of cuts,” he said. “At a minimum, you want to see at least a full percentage point [or 100 basis points]. This first one is not going to move the needle.”
Whichever approach the Fed took this week would have amounted to “practically nothing from a consumer standpoint,” Sonola said in an interview ahead of the Fed’s announcement.
Even zooming out to look at Americans’ total revolving-debt volumes, the difference between a cut of 25 basis points and 50 is paltry.
Take a broader example, as outlined by Callie Cox, chief market strategist at Ritholtz Wealth Management: Americans hold about $4.9 trillion in debt, not including mortgages.
If you assume that all of the debt is adjustable — meaning the interest rate can change in response to the Fed’s moves — then a cut of 25 basis points would save Americans about $3.8 billion a year, Cox said.
That’s about half the amount of money that consumers spent on office supplies last year, she wrote.
“You could analyze this rate cut to death. Or you could skip the unneeded anxiety and focus more on [Fed Chair Jerome] Powell’s [comments] about the economy and future policy,” Cox wrote. “The path and degree of cuts over the next year or so matters the most.”
That doesn’t mean the Fed’s move will have zero impact on consumers or on the broader economy. Lowering interest rates at the right pace could mean the difference between a soft landing — keeping prices stable and the job market healthy — and a flub that tips the economy into a downturn.
And though the impact of an initial cut could be limited, additional cuts at future Fed meetings would eventually — and significantly — lower the amount of interest that Americans pay on their mortgages, car loans and other forms of credit. It will also lower the amount of interest they earn on savings accounts and certificates of deposit.
In other words, it’s the pace and trajectory of multiple interest-rate cuts that will cause a more noticeable shift in Americans’ financial lives, experts said.
The real-world differences in credit-card bills may be small after a cut of either 25 or 50 basis points, said Moody’s Analytics economist Matt Colyar, but the Fed’s message Wednesday still matters.
Investors will be poring over the Fed’s explanation and its penciled-in path for future interest rates. If Wall Street likes what it hears, stocks may take a run higher — which will look nice to people who keep close tabs on their 401(k) accounts, he said.
“It’s more a psychological effect,” he said, “as nebulous as that is.”
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