The Federal Reserve expects to cut rates more slowly in 2025, which could impact mortgages and home sales.

NEW YORK — The Federal Reserve’s third interest rate cut of the year will likely have consequences for debt, savings, auto loans, mortgages and other forms of borrowing by consumers and businesses.

But with inflation pressures still elevated, the Fed indicated in mid-December that it’s likely to cut rates more gradually in 2025 than it had projected three months ago. The policymakers now envision two rate cuts next year, not the four they predicted back in September.

The result is that borrowers who have been hoping for much-lower-rate loans could be disappointed. Loan rates may barely budge if the Fed sticks with its plan to cut its key short-term rate only twice next year.

“This could be the last cut for a while,” said Jacob Channel, senior economist for LendingTree. “Because the upcoming Trump administration’s policies might cause a resurgence in inflation or otherwise throw the economy off balance, the Fed might choose to take a wait-and-see approach and hold rates steady at their January meeting.”

A gradual pace of rate cuts won’t mean much to people with credit card debt.

“Another rate cut is welcome news at the end of a chaotic year, but it ultimately doesn’t amount to much for those with debt,” said Matt Schulz, chief credit analyst at LendingTree. “A quarter-point reduction may knock a dollar or two off your monthly debt payment. It certainly doesn’t change the fact that the best thing cardholders can do in 2025 is to take matters into their own hands when it comes to high interest rates.” 

The average annual percentage rate on a new credit card offer, according to LendingTree, is 24.43%. In September, it was 24.92%. Further modest declines in that rate, Schulz said, are possible in the next few months. 

But, he cautioned, “Anyone expecting card rates to go from awful to amazing overnight because of the Fed is going to be sorely disappointed.”

Elizabeth Renter, senior economist at NerdWallet, said that particularly for credit card users who carry debt from month to month, “It’s a drop in the bucket for anyone feeling pressure from high rates.”

High-yield savings accounts remain a good option

For savers, returns on high-yield accounts have dropped, too, in tandem with the Fed’s rate cuts. So while these accounts are not quite as attractive as they had been, they might still be worth investigating if you haven’t shopped for one recently. Some of these accounts offer yields at or near 5%.

“Yes, you’ve missed the peak rates seen a few months ago,” Schulz said. “But even at these levels, they’re still likely higher than what you’ll find at a traditional bank.”

Will mortgage rates ease? Maybe

Though the Fed doesn’t set mortgage rates, it does influence them. Long-term mortgage rates generally track the yield on the 10-year Treasury note, which, in turn, is driven in part by the market’s outlook for inflation and the Fed’s benchmark rate.

That means that, at least indirectly, cuts to the Fed’s key rate can put downward pressure on mortgage rates, even if they don’t move in lockstep.

“Case in point, turmoil in the bond market has caused mortgage rates to yo-yo up and down over the last month,” Channel said. “After peaking at 6.84% for the week ending Nov. 21, the average rate on a 30-year fixed-rate mortgage has since come down to 6.60%.”

Despite this decline, this average remains well above the 2024 low of 6.08%, back in late September. 

For people with fixed mortgages, their rate won’t change unless they refinance their mortgage or sell and move someplace else. 

Auto loans reflect lower rates

The effects of the Fed’s half-point rate cut in September and its quarter-point cut in November have largely been passed through to auto loans, which fell on average from a peak of 7.3% in July to 6.8% last month, said Ivan Drury, director of insights for Edmunds.com.

The half-point drop, he said, has helped more people afford new vehicles, helping to spur a buying spree in November. But the increased demand, which Drury attributed largely to some optimism over Trump’s election, also boosted average prices and monthly payments to record levels.

“Optimism and having money on hand to do these things has definitely green-lit some people’s spending, when other folks are more conservative with how much they’re spending,” he said.

The average amount that a car buyer financed rose to $42,160, and average monthly payments hit $753, according to Edmunds data.

Edmunds expects only a modest increase in auto sales next year, from just under 16 million vehicles this year to 16.2 million in 2025.

The Fed will closely monitor inflation and the job market

“The Federal Open Market Committee is in a balancing act — cut (rates) too much and risk inflation resurgence; cut too little and continue to squeeze the labor market,” said Renter of NerdWallet.

Gregory Daco, chief economist for EY, suggested that Fed Chair Jerome Powell is reiterating “the familiar metaphor of moving slowly in a dark room full of objects to justify a potential rate cut ‘skip’ at the January meeting. 

“This will favor a gradual easing of policy to observe how the economy and inflation behave, indicating an extremely ‘data-dependent’ approach,” Daco said.

A more gradual reduction of rates isn’t guaranteed

“Remember,” Channel said, “the Fed is designed to pivot relatively quickly should something unexpected happen. If the economy shows serious signs of deterioration, we could see bigger and more frequent cuts over the next 12 months.”

On the other hand, he cautioned, “if inflation rears its head and spikes once more, (rate) cuts might be moved off the table.”

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