The Federal Reserve is on the cusp of cutting US interest rates in September. A low interest rate environment will typically lead to better borrowing conditions but end the good run for savers, financial experts say.
Whether it is beneficial to wait and watch for more interest rate cuts or act now will depend on your specific financial circumstances, they advise.
“For example, it is a good idea to act now if you have high-interest debt,” says David Denton, technical consultant at investment management firm Quilter Cheviot.
“Although there may be more cuts on the way, it is never wise to let debts continue to pile up, so making the most of a rate cut sooner rather than later is wise.
“However, while it is good to take advantage of broader macro-economic conditions if you can, it is not sensible to plan your finances solely around things like rate cuts, which are out of your control.”
The Federal Reserve may begin cutting interest rates for the first time in four years at its meeting on September 17 and 18.
Most central banks in the GCC follow the Fed's policy rate moves due to their currencies being pegged to the US dollar.
The Federal Open Market Committee has kept the federal funds rate at 5.25 per cent to 5.5 per cent since July 2023, but markets are now heavily favouring a quarter-point cut in September.
Expectations of a rate cut are based on the continuing cooling in inflation at all levels in the US.
The Consumer Price Index (CPI) report from July 15 showed a 0.1 per cent drop in prices for June and a modest 3 per cent year-on-year increase.
Inflation in the US had reached a 40-year high of 9.1 per cent in June 2022.
“Awareness is key,” says Carol Glynn, founder of Conscious Finance Coaching. “Knowing it is coming, then look at the areas of your finances it will likely impact.”
“Do you have debt or savings? Then you will be impacted.
“Are you planning to buy a home or take out a loan? Then you will be impacted.”
Lower interest rates mean a range of personal finance products – from loans to credit cards, mortgages and savings – will be affected and borrowing will become less expensive. Here is a look at how consumers can prepare their finances:
Mortgages
A Fed rate cut makes it a good time to refinance existing mortgages or lock in a new, lower fixed-rate loan.
The cut will probably lower interest rates on new mortgages and refinancing options, according to Ben Bolger, a financial planner in Abu Dhabi and co-founder of digital learning platform Squirrel Education.
“This means lower monthly payments for borrowers, making home ownership and refinancing existing mortgages more affordable,” he says.
“Homeowners could consider refinancing to secure a lower rate and reduce their overall interest expense over the life of the loan.”
However, it is important to factor in the costs of refinancing as this may erase any benefits of a lower rate, he warns.
Homeowners can save significantly on interest payments over the life of their loans, increasing disposable income for other investments or savings, Quilter Cheviot’s Mr Denton says.
However, given how much rates have had to climb, he believes it is unlikely that the first cut in rates will have a big impact.
“Mortgage rates are determined by swap rates, which are the interest rates that lenders pay to offset the risk of fixed-rate lending,” he says.
“Swap rates are a major contributing factor to the final mortgage rate offered to a homeowner and these rates often price in the cost of an interest-rate cut far before the event actually happens.”
Fixed-rate mortgage holders will not see a change until their fixed terms have expired.
But there might be an opportunity to lock in lower rates if you have a high-interest mortgage, Ms Glynn suggests.
“Research switching from a variable to a fixed-rate mortgage during times of lower interest rates to stabilise payments and lock in savings on interest,” Ms Glynn recommends.
“But be patient, it may take months, if not years, to see a material impact on rates unless the Fed makes unexpected large interest rate cuts.”
Credit cards
Interest rates on credit card balances typically decrease following a Fed rate cut, Mr Bolger says.
While this reduces the cost of carrying a balance, consumers should still aim to pay off high-interest debt quickly to avoid accumulating more interest charges, he warns.
“Consumers should consider transferring balances to lower-rate cards and paying down high-interest debt more aggressively to take advantage of reducing rates,” Mr Denton says.
However, it is not guaranteed that banks may pass on the interest rate cut to their customers, according to Ms Glynn.
Pay down as much of your credit card debt as possible now, regardless of interest rate, as even in low Fed interest rate periods, credit cards are still extremely expensive forms of debt, she says.
Watch: US Federal Reserve keeps interest rates on hold
Loans
Interest rates on car and personal loans are also likely to decrease, making borrowing cheaper.
This could spur consumer spending in these categories, as lower monthly payments increase affordability, according to Mr Bolger.
Ms Glynn suggests waiting to get a car or personal loan to get better terms after the rate cut.
Shop around for the best deals as rates can vary widely, she says, and it may take time for the rate cuts to trickle down to the consumer.
“But also be aware, lower interest rates tend to create more demand and so can increase prices, which often offset the benefits lower interest rates bring,” she adds.
Savings
The yield on savings accounts, certificates of deposit and other interest-bearing deposit accounts will probably decline, Mr Bolger believes.
Savers may see reduced returns on their deposits, which could prompt a search for higher-yielding investment alternatives, such as bonds or dividend-paying stocks, he says.
Realistically, how much you will save when the Fed lowers rates will depend on how quickly it cuts and by how much each time, he adds.
“A rate cut generally leads to lower interest rates on savings accounts, meaning people will earn less interest,” Mr Denton says.
“Despite many people perceiving cash as safe, unless you are making an inflation-beating return, you will be losing money in real terms constantly.
“Savers, therefore, might consider other investment options to achieve higher returns and help ensure their money does not essentially decay.”
technical consultant, Quilter Cheviot
Diversifying into higher-yield investments, such as bonds or stocks, could offer better growth potential but this comes with added risk, he warns.
If you have cash that will not be needed for the coming year or more, consider locking in higher rates with long-term savings products like fixed-term deposits before the rates decrease, Ms Glynn recommends.
Which countries will be affected more?
The US is naturally directly impacted as the Fed’s decisions primarily affect its economy first, says Ms Glynn.
“In countries with currencies pegged to the US dollar, like many countries in the Middle East, including the UAE, monetary policies in these countries often mirror those of the US and so they will also be affected,” she says.
“Any country with US dollar debt or [that] operates trade in USD, will also be impacted. Fed interest rates influence global financial markets, affecting trade, investment and economic stability worldwide.”
Regions with higher dependency on US trade and financial systems, such as Europe and emerging markets, will be more affected by the Fed’s rate cut, according to Mr Denton.
These areas might experience capital inflows, currency appreciation and changes in their own central bank policies to align with the Fed’s actions, he states.
Conversely, regions with less direct economic linkage to the US might see more subdued effects.
“North America, Canada and Mexico will likely experience larger impacts due to their strong economic connections with the US and the USMCA (United States-Mexico-Canada) trade agreement,” Mr Bolger says.
“In addition, emerging markets with substantial dollar-denominated debt may face increased financial volatility and currency fluctuations.
“A Fed rate cut may initially ease their debt servicing costs, as borrowing in dollars becomes cheaper due to lower interest rates.
“This can provide short-term relief for many countries such as Turkey, Argentina and South Africa, which have significant amounts of debt issued in US dollars.”
