(WASHINGTON) — A Federal Reserve announcement rallied all three major stock indexes to one-year highs on Wednesday — and the enthusiasm owed little to what the central bank actually did.
In addition to pausing its benchmark interest rate, the Fed forecasted a series of rate cuts next year. The move would start to reverse a near-historic string of rate increases that has sent borrowing costs soaring.
The anticipated interest rate cuts would deliver relief for many consumers — but not all of them, financial experts told ABC News.
Rate cuts would ease the burden on borrowers for everything from home mortgages to credit cards to cars, making it cheaper to get a loan or refinance one. The cuts would also boost company valuations, potentially helping fuel returns for stockholders.
Savers, however, stand to lose income as interest rates decline for accounts held at banks.
“The Fed will come and take lots of pressure off of households next year,” Mark Zandi, chief economist at Moody’s Analytics, told ABC News. “It won’t be for all households.”
Earlier this year, mortgage rates reached their highest level in more than two decades; while the average rate for credit card holders topped anything on record at the Fed. Interest rates for car loans have soared to levels last seen at the onset of the 2008 financial crisis, Edmunds found.
Interest rate cuts would bring many of those payments down, delivering gains for borrowers. On Thursday, mortgage rates fell below 7% for the first time since August, Freddie Mac said in a statement.
“It’s a really big shift for consumer financing,” Derek Horstmeyer, a finance professor at George Mason University’s School of Business, told ABC News.
Christine Benz, the director of personal finance at Morningstar, echoed the sentiment. “Lower interest rates would obviously be fabulous news for anyone in the market for a home mortgage or loans with rates that are adjustable,” Benz told ABC News.
A potential set of rate cuts next year could also bring strong performance in the stock market, some experts said, since the value of companies often rises as interest rates fall. The three major stock indexes ticked up on Thursday in an apparent extension of the rally a day prior.
However, the market performance may not follow through on the surge in recent days because forward-looking investors are now anticipating the rate cuts, leaving less room for a boost when the policies go into effect, Zandi said.
“I wouldn’t count on stock prices continuing to rocket higher,” Zandi said. “The window on that is probably already closing.”
Meanwhile, the promise of largely good financial news turns sour for savers.
The aggressive series of rate hikes since last year has spurred an increase in interest rates for savings accounts at banks. Moreover, the trend has given rise to a surge of high-yield savings accounts that offer as much as 5% annual yield.
A reversal of the Fed’s policy would be sure to send those yields downward, experts told ABC News.
“Savings account yields are the most attractive that they’ve been in years, but they can change on a dime when interest rates do,” Benz said. “It’s a good reason to not park too much of your portfolio in safe investments with the expectation that high yields will persist indefinitely.”
“The possibility of interest-rate cuts next year underscores how transient the return you earn on safe investments is,” Benz added.
Copyright © 2023, ABC Audio. All rights reserved.