The Federal Reserve Cut Rates Again; Here’s What That Means For Your Mortgage, Home Construction And More

The Federal Open Market Committee decided to cut the federal funds rate yet again today, lowering its target range to 1.5% to 1.75%. This marks the third time the Fed has cut rates in as many months.

According to the FOMC itself, “Although household spending has been rising at a strong pace, business fixed investments and exports remain weak.” The Committee also noted “implications of global developments” and “muted inflation pressures” as reasons behind the change.

The reduction was largely anticipated by experts and is the third consecutive cut from the Committee. The trend began at the FOMC’s July meeting, when the majority of members voted for the first rate cut in nearly a decade.

Here’s what experts say the move means for the average American:

1. It will make renovating your house more affordable.

“Today's Fed rate cut will soon make it less expensive to fix up your home as sellers prepare for the 2020 homebuying season. A lower Fed rate reduces the cost of borrowing from a home equity line of credit—a popular way for homeowners to pay for renovations and repairs. While the prime homebuying months are in late spring and summer, buyers often start looking at homes as early as February, so the timing of today's cut is coming at an ideal time.”

2. It will make new home equity loans more attractive.

“The interest rate cut will tighten the gap between mortgage rates and home equity rates. In the recent environment of low mortgage rates, many homeowners pursued cash-out refinances to pull money out of their homes. A drop in interest rates would make home equity products a more competitive alternative for homeowners looking to tap their equity for large purchases."

— Jon Giles, head of home equity lending at TD Bank

3. It will make existing home equity loans cheaper.

“Most home equity products are priced based on the prime rate. A reduction in the Fed funds rate will result in a corresponding drop in prime and lower rates for borrowers. New borrowers will have cheaper access to credit, and those who already have a home equity line will see lower monthly payments.” 

— Giles

 4. It could spur more home construction.

“Given that the housing market faced a 10-year low for housing affordability last fall, the Fed’s approach is a net positive for future housing demand and home construction, while offering a small offset for rising construction costs. These costs are limiting housing inventory, particularly at the entry-level market.” 

— Robert Dietz, chief economist at the National Association of Homebuilders 

 5. It won’t mean much for your 30-year mortgage.

“It’s easy to think the grass is greener—or lower—on the other side of the Fed’s actions. However, there really isn’t much of a relationship at all between mortgage rate movement and the rate announcements made by the Fed. The Fed only changes one rate and that rate doesn’t have much at all to do with your mortgage; it’s the rate that banks and credit unions use to lend to each other overnight—in other words, not your mortgage rate. The bottom line is this: don’t buy—or sell—Fed talk.” 

— Emanuel Santa-Donato, director of capital markets at Better.com

6. It might make your credit card payments more affordable.

“Most credit cards are affected directly by the prime rate, so consumers should begin to see a small cumulative impact from this third consecutive cut. When combined with cuts in July and September, consumers will have seen an overall decrease in 75 basis points in rate since the summer. However, another 25 basis point decrease won't result in a dramatic change to a customer's monthly credit card bill. While the initial impact may not feel seismic, the third consecutive rate decrease serves as a small but welcome early Christmas gift from the Fed, as many consumers are gearing up to use their credit cards through the holiday season.”

— Mike Kinane, head of U.S. bankcards at TD Bank

 A Look Ahead

At the end of the day, experts say the cut speaks to expectations of a larger economic slowdown—one that consumers have the power to stop. 

As Mike Rittler, general manager at TD Bank explains, “Despite these early signs that the economy may be softening, the direction it heads next will ultimately be driven by the consumer. The holidays are around the corner and early forecasts predict that retail sales could see a noticeable increase over last year. With that in mind, it'll be interesting to see how consumers react to a third consecutive rate cut and what they do with their dollars. Their behavior will dictate how we close out the year and begin 2020.”