MW Why Americans still can't get cheaper mortgages, car loans or card balances after three Fed rate cuts

Andrew Keshner, Venessa Wong and Aarthi Swaminathan

'This is one of the worst rate-cutting cycles ever for consumers,' says one expert

After the Federal Reserve began cutting its benchmark interest rate in September, many consumers hoped the cost of borrowing money would also fall. Instead, the opposite has happened.

Mortgage rates actually increased and have remained a major hurdle for prospective home buyers. Car loans haven't downshifted much, and credit-card annual percentage rates, or APRs, have only crept slightly lower - offering little relief to people who have run up debt to cover everyday costs.

Meanwhile, the yields paid on savings accounts and money-market funds are already getting smaller.

Roughly four months since the central bank started pulling its short-term rate away from a two-decade high, the rate environment remains terrible for Americans looking for a break.

"This is one of the worst rate-cutting cycles ever for consumers," Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management, told MarketWatch. "You're earning less on your cash and you're paying more on your borrowing. ... It's just been a double whammy."

The Fed kept its short-term rate at 4.25% to 4.50% on Wednesday in its first rate decision of 2025, after making a 1-percentage-point reduction in the final months of 2024.

But the Fed's decision to hold won't make a difference to many people's financial well-being, according to a recent survey. Some 62% of respondents to a recent Morning Consult survey said interest rates are too high. That's down from 68% in June, but it's a "modest" drop, according to Morning Consult economist Sofia Baig.

It takes time for the Fed's decisions to filter through the economy - and then even more time for consumers to see the difference. "It's a double lag, basically," Baig said.

Millennials are especially sensitive to changes in interest rates, the survey found, with 82% saying high rates have affected their household's finances, compared with 75% of adults overall. Members of the demographic are right in their prime years of spending on families, homes and cars, so they're more likely than other generations to see the latest financing costs up close, Baig said.

"They are just more in the time of their life to be taking on debt," she said, which makes them "more exposed to the whims of interest rates."

Millennials may be feeling interest-rate pressures most acutely, but other age groups in the survey were also feeling the pain, underscoring the gap between positive macroeconomic indicators and people's perceptions of their finances.

Part of the disconnect for consumers is that prices for basic goods and services remain high compared with prepandemic levels. Also, while short-term yields - for instance, interest rates on savings accounts - move in tandem with the effective federal-funds rate set by the Fed, interest rates for consumer loans do not.

Mortgages and car loans, for instance, are tied to longer-term Treasurys. As the economy remains strong, the 10-year Treasury yield BX:TMUBMUSD10Y increased from 3.715% in mid-September to 4.533% on Wednesday.

"The tough part for consumers [hoping for lower borrowing costs] is it might take a slowing economy to bring yields down," Carlson said. "It's a Catch-22." The best most consumers can hope for is that their employers do well so they can earn higher wages, he added.

Elizabeth Renter, senior economist for the personal-finance website NerdWallet (NRDS), said she expected the Fed to hold rates steady this week. "For consumers and business owners, this means higher borrowing costs are largely here to stay, for the time being," she said.

No big rate changes expected for home buyers in 2025

The Fed's rate cuts have done little to bring down mortgage rates, and that has put a damper on home-buying plans across the board.

The 30-year mortgage rate first jumped to 7% in the second half of 2022, after the Fed began to tighten monetary policy to control inflation. Since then, rates have largely stayed close to 7%, even as the Fed backed off.

Buyers got a small and short reprieve last year: The 30-year rate fell significantly and moved close to 6% in September, boosting home sales and refinances.

Since then, the 30-year fixed rate has gone back up to 7% as the financial markets try to assess how President Donald Trump's policies could impact inflation and the Fed's interest-rate plans moving forward. The 30-year mortgage rate is not expected to move much over the course of 2025.

One recent forecast by the housing-finance giant Fannie Mae (FNMA) suggests the 30-year mortgage rate will close 2025 at an average of 6.5%, and 2026 at an average rate of 6.3%.

In sum, "the 2025 housing market is shaping up to feel a lot like 2024," Mark Palim, Fannie Mae's chief economist, said in a statement.

So it's no surprise that most consumers looking to buy a home feel like the Fed's rate cuts have done little to impact their lives. About seven in 10 Americans say the housing market has never been worse for buyers than it is right now, according to a recent survey by NerdWallet.

Unlike homeowners in other parts of the world, most homeowners in the U.S. who aren't looking to buy have also likely been immune to the Fed's rate cuts, as they have ultralow fixed-rate mortgages.

Homeowners in countries like Australia, for instance, mostly have variable-rate mortgages, where their rates go up as their central bank increases its interest rates.

The chart below from the Reserve Bank of Australia shows how relatively insulated U.S. homeowners are from mortgage-rate volatility.

The share of homeowners with ultralow rates - many of whom secured those during the pandemic - is also significant. About 73% of homeowners with an outstanding mortgage have an interest rate below 5%, according to an analysis of federal government data by Realtor.com. That's far below the prevailing 7%. (Realtor.com is operated by News Corp subsidiary Move Inc. MarketWatch publisher Dow Jones is also a subsidiary of News Corp.)

Millennials, in particular, have felt the sting of persistently high mortgage rates, as they make up the largest share of home buyers, according to the National Association of Realtors.

Back in the 1980s, the typical first-time home buyer was in their late 20s. Now they're 38 years old, the NAR added - the oldest average age on record.

Car-loan rates remain high, but car prices are a bigger problem

The average interest rate on new cars fell to 6.8% in the fourth quarter of 2024 - when the Fed first started cutting rates - from 7.4% a year earlier, according to data from the car-buying site Edmunds. For used cars, the average rate fell to 11% from 11.6% during that time.

Despite lower borrowing costs and a marginal decrease in car prices, buyers of new cars still had higher average monthly payments because they were borrowing more. Their average monthly payments were $754 in the fourth quarter, compared with $739 during the same quarter in 2023.

Used-car buyers' average payments, on the other hand, fell by $28 to $533, according to Edmunds.

"It's not like the price of vehicles is improving dramatically," Joseph Yoon, Edmunds' consumer-insights analyst, told MarketWatch. The average selling price remained high, at $47,465 for new cars and $27,252 for used cars in 2024. "We're still a long way from anything good happening for the consumer."

Credit-card APRs are lower. So what?

APRs for new-card offers have nudged lower, going to an average of 24.26% in January from 24.43% in December, after reaching record highs earlier in 2024, according to LendingTree (TREE). That's a meager 17-basis-point decrease. (A basis point is one-hundredth of a percentage point.)

The average rate on a card carrying a balance preliminarily dropped to 22.80% in November from 23.37% in the third quarter, according to the Fed.

Lending rates on credit cards are pegged to the prime rate, which is generally about 3 percentage points higher than the Fed's rate. Banks typically tack another 12 or 13 percentage points for a wider margin - and then there are the individual considerations on a borrower's credit score.

It usually takes one or two months for a Fed rate change to filter down into a credit card's annual percentage rate, experts said. But credit-card APR margins are so wide to begin with that a couple of cuts to the Fed's rate and the connected prime rate will not make a big difference, according to Luke Sotir of Equitable Advisors.

Besides, credit-card balances have grown so large that a slightly lower APR may not produce much savings. People with a balance had nearly $6,400 in debt on average in the third quarter, according to TransUnion.

Rates for savings accounts and money-market funds already moving lower

Nationally, the average percentage yield on savings accounts is down to 1.16% from 1.22% a year ago, according to data from the Federal Deposit Insurance Corporation. In the sector of high-yield accounts that will pay more interest for deposits compared with megabanks, the arrow is also pointing down - though it's possible to find high-yield savings accounts still paying over 4% APY.

In the Morning Consult survey, the savings account was the place where the largest share of people (17%) noticed a decrease in interest rates. "It's one of the more visible rates," along with mortgage rates, Baig said.

But compared with mortgages, there's a much wider range on deposit-account APYs, Sotir said. While many rates may feel like they are stagnant or going in the wrong direction, savings and CDs are places where people have more control - as long as they watch their money and are willing to shop around.

"If you don't pay attention and are happy to take the lower interest rate, the bank is happy to give the lower interest rate for deposits," Sotir said.

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January 31, 2025 16:33 ET (21:33 GMT)

MW Why Americans still can't get cheaper -2-

Rates for money-market mutual funds are also moving lower, but they're still giving many banks a run for their money.

Money-market funds are not bank accounts, but super-safe investment destinations to park cash. The average seven-day yield on the biggest funds is now around 4.19%, down from 5.10% at the start of the Fed cuts, said Peter Crane, president of Crane Data.

"Rates really shouldn't move much unless and until the Fed moves," Crane said.

Even if the rates are a full percentage point lower than they were a year ago, the current spot is still high for recent years, he noted. Money-market rates were last around the 4% range nearly two decades ago, Crane said.

"It's still not in a bad spot," he said. "I think savers are still happy in general."

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-Andrew Keshner -Venessa Wong -Aarthi Swaminathan

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January 31, 2025 16:33 ET (21:33 GMT)

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