Better news for borrowers: What Federal Reserve rate cut means for Michigan

The long-awaited cut to the interest rate that guides how much consumers pay to borrow money came in on Wednesday at 0.5%.

The rate cut — the first since the pandemic —  brings the federal funds rate, or the rate charged by banks as they lend to each other, to a benchmark of between 4.75% and 5%. 

“Inflation is moving sustainably toward 2%,” the Federal Reserve said with the announcement. With it, the Fed added, “the risks to achieving its employment and inflation goals are roughly in balance.”

Inflation peaked at 9.1% in June 2022. 

The economy is likely to need time to adjust to the new rate. Borrowers have been paying interest based on a 5.33% federal funds rate in effect for a full year after several months of the rate increasing. This chart shows its history.

Increases during the pandemic were meant to stem U.S. inflation, which increased along with inflation across the world as a result of supply chain imbalances during the pandemic. (The U.S. inflation rate is now among the lowest around the globe.)

Time will tell how this move affects the average person. Some may have felt little impact. 

But for people who choose to borrow money, interest rates have been higher than they have been for years for home purchases, cars, home equity loans and credit cards.

The buyer of a $400,000 home with good credit who puts 20% down paid $700 more over recent months than a few years ago. Using a home to secure a home-equity line of credit recently resulted in about 8% interest, while carrying a balance on a credit left borrowers looking at an interest rate of as much as 30%.

In the car market, new car loans for a borrower with good credit have been averaging about 7%, while the same borrower would have paid 9% interest on a used car.

However, someone with a credit score under 500 who is borrowing money for a vehicle could have been paying 4-9 percentage points more for a new car, and a whopping 13 percentage points — as much as 21% —  more for a used car. 

The difference — before the rate cut — could have added $200 to the monthly payment for a typical $27,000 used car.