Profiting through the Fed’s latest interest rate pause

Rates on consumer loans and financial products will be directly influenced by the latest decision of the Fed Reserve. The decision pertains to putting a pause, by keeping the present rates fixed, which will benefit the people by means of limiting the interest payments on the debts incurred.

On Wednesday, the Fed decided to keep its overnight bank lending rate where it is, after a full percentage cut announced last year. This translates as a chance to have good inflation-beating returns on the savings while being aware enough to put them wherever needed. Apart from that, anyone will be saved from spending extra money when actually, it might not be needed.

Greg McBride, chief financial analyst at Bankrate explained, “Borrowers shouldn’t bank on the Fed being in any hurry to cut interest rates again, so focus on paying down high-cost debt. On the bright side, savers will continue to enjoy returns that outpace inflation if the money is parked in the most competitive (accounts).”

According to Bankrate, one can consider an FDIC-insured money market account having rates as high as
4% to 4.75%. Others are paying the same rate throughout the past week, which for the new entrants means that their money can grow faster than inflation. However, the last reading was roughly around 3%.

Often, people are satisfied with lower returns on their money, even if they have savings accounts in the biggest banks. As per a statement from Bankrate, the national average interest rate on the savings account is a mere 0.55%.

This is in complete contrast with the US Treasuries which offer between 4.10% and 4.34% interest rates and these are exempt from state and local taxes. This is a very good option if one is living in a high-tax area. A second option is that of an uninsured FDIC (the Federal Deposit Insurance Corporation) money market mutual fund that comes with a low-risk debt.  

According to Crane Data, this week an average return of about 4.19% is still running with an investment on a short-term basis. For insurance, there is Securities Investor Protection Corp. where anyone’s overall account is sure to be insured, particularly investing through brokerage.

Another option is an online high-yield savings account insured by the FDIC. In it, anyone can put bulk savings which come in handy in meeting near-term goals, like an upcoming vacation or unexpected expense like a car repair. Also, emergency fund money can be saved in the same manner and with the same interest yields.

As per a statement from Schwab.com, the options regarding interest rates were about 4.25% and 4.65% on the CDs. This was on Wednesday before the Fed meeting happened. For CDs ranging between three months to five years, the requirement is to save money for a given time period and the earnings are fully taxable. At both the federal and state levels, the CDs are fully insured by FDIC.

To meet different long-term goals, certificates of deposit, US Treasuries or AAA-rated municipal bonds are among the choices when withdrawals aren’t needed very soon. For intermediate-term goals like buying a home on a down payment, within the next three to five years, for instance, these options are best to choose from.

Payment of living expenses, especially in the first year or two, also can be met through these certificates and bonds. However, they come with different tax rates and different rules for an early cash withdrawal.

High-quality municipal bonds, especially AAA-rated ones, as per Schwab.com are paying between 2.61% and 4.21% and exempted from the federal tax. And, according to TurboTax, local and state taxes are also done away on the state taxes which anyone might be applying, issued by the state. Putting up in a high tax area or even in a state with little to no income taxes, won’t make a difference either.

Fed won’t lower its rate for some time

A possible rise in inflation due to the proposed tariff hike by President Donald Trump might raise the interest rates. In a way, one can benefit from these, due to the interest payments on the debts incurred, being on a cost-high side.

That said, chances of securing a most favorable interest rate on any bank loan will improve, as the Fed might not lower its key rate again for the next few months. Michele Ranieri, a vice president at TransUnion says, “Consumers should continue to monitor their own credit scores and credit reports to make sure they are in the best possible position to act when rates do come down.”

Echoing in the same fact, Matt Schultz, LendingTree credit expert says, “That (averting the high interest rates, if Fed does away with it) means it is maybe more important than ever to get that high-interest debt under control.”

According to Bankrate, average credit card rates are extremely high with a record high of 20.79% in August 2024, followed by a low of December with 20.35% and currently hovering around 20.14%. Amongst many ways to reduce the credit card bill, is to go for a 0% balance transfer card and also, consolidation of high-rate credit card debt into a personal loan can make a huge difference. Schultz said, asking the credit card issuer to lower the rate helps.

Home mortgage rates are dependent upon the Fed’s anticipated action, which in turn, is influenced by inflation and growth expectations. In case, if anyone carries a mortgage rate above 7%, calculations should follow suit to whether refinancing is possible to secure a lower rate. If anyone is able to cut the rate up to one-half to three-quarters of a percentage point, a refi may be worth considering.

If paying money for a longer span of time isn’t feasible for you, then a better option is to go for a loan which is considerably cheaper. That way, one is able to pay down whatever might have been borrowed as soon as possible.

One might have to part with a good portion of the money to maintain the credit line, closing costs or minimum withdrawals and closing costs, for that, HELOC is a better option. In this case, the rate is less of a concern due to non-utilization of this emergency back up and one might never actually use it.

In the case of Car loans, Jessica Caldwell, head of insights at Edmunds.com recommends exploring the market to get a fair idea of what exactly suits you. Afterward, calculations can follow to zero down on the interest rate you can pay over the loan. She further says that loans on new cars and certified pre-owned cars have subsidized loan incentives attached to them.

That means one can get a better deal on a new car due to the latest drop in the rates, translating into better savings for anyone. A used car loan should be, thus, given a go by the customers who intend to buy the vehicle.

Before the Fed started lowering the rates in September 2024, as per the data from car site Edmunds.com, used car loans averaged around 10.8% and about 7.1% in December. Yet, consideration should be based upon the improvement in credit score rather than refinancing an existing car loan in the past.

A high rate of about 15% or more can justify the refinancing, otherwise, a full percentage drop might only save around $16 a month on a $35,000 car loan, according to Bankrate. A point that even Caldwell endorses.