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The Fed rate cut: What it means for your bank accounts, loans, credit cards, and investments
There was another quarter-point cut to short-term interest rates on Thursday from the Federal Reserve.
With the election over, stocks soaring, and rates declining, frothy optimism is bubbling up in the capital markets.
With inflation at 2.4% in September — within fractions of the 2% target — Fed officials decided to cut interest rates by another 0.25%. The challenge remains: soft-land the economy.
There are a lot of moving parts to coordinate.
Read more: Fed predictions for 2024: What experts say about the possibility of more rate cuts
How monetary policy works
The Fed controls one interest rate: the federal funds rate, the short-term rate banks use to borrow from each other. The target range for the federal funds rate currently stands at 4.50-4.75%.
Fed interest rate decisions filter through the financial world, impacting virtually every facet of borrowing costs and saving rates. Interest rate management is monetary medicine the Fed uses to:
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Slow the economy by raising interest rates in an effort to tame rising costs (high inflation) as measured by the consumer price index.
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Help mount a recovery when we're at the opposite end of an economic cycle by lowering interest rates as an injection of liquidity into the financial system.
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Allow past moves to take root while the Fed considers future actions by holding rates steady.
What the Fed says is ahead for interest rates
In a press conference on Nov. 7, Fed Chairman Jerome Powell said that "as the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals."
He reiterated that the FOMC makes its decisions meeting by meeting and can adjust monetary policy as conditions warrant.
"If the economy remains strong and inflation is not sustainably moving toward 2%, we can dial back policy restraint more slowly. If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can move more quickly," Powell said.
Here’s how the Fed’s new interest rate strategy could trickle down to your loans and accounts.
How lower interest rates affect checking and savings accounts
Your short-term liquidity depends on money in the bank. As interest rates rose, so did deposit account rates.
Now, cash in the bank will start earning less. Savvy savers will need to hunt for the best returns as providers begin easing their interest rate payouts.
Checking accounts
Checking accounts that pay interest offer the most meager returns. But you need quick access to the money, and if you manage your cash flow, the bank won't have most of that money in its hands for long.
Interest-earning checking accounts paid a national average of 0.07% monthly in October 2023. A year later, that rate was unchanged at 0.07%. That's already fractionally lower from the 0.08% interest paid in September of this year.
Savings accounts
Short- to mid-term money is best parked in a savings account. It's part of your easy-in, easy-out cash strategy. Last year, in October, the monthly average interest rate on a traditional savings account at a brick-and-mortar bank was 0.46%. Last month it was 0.45%.
High-yield savings accounts pay more — Yahoo Finance is seeing high-yield savings account APYs ranging from 4.00% to 5.25%. You can see that shopping rates really pays off. (APY is the result of compounding your interest rate. Compounding periods can vary by bank.)
Money market accounts
A money market account often boosts your return from a common checking account, but you'll likely need to deposit anywhere from $10,000 to $100,000 to earn the raise.
Last October, the national average monthly interest rate was 0.65%. One year later, it is 0.61%. Consider putting your second layer of cash in an above-average money market account. It's the money you want close at hand, but not checking account close.
To do that, look for a high-yield money market account. As the Federal Reserve continues to lower interest rates, high-yield money market accounts will start paying less. Yahoo Finance is seeing high-yield interest rates from 4.00% to 5.25%.
What to do now: Shop rates at banks, both brick-and-mortar and online. Keep your near-term cash nimble and earning the best rate it can.
What Fed policy does for CDs
This new lower-interest-rate cycle will impact CDs too.
A 12-month CD was earning 1.79% monthly interest in October 2023. A year later, the same term CD was paying 1.81%. But those national averages don’t always reflect better rates you can find by shopping around: the best CDs are around 4.50 to 4.85% APY for a six-month term. Your minimum deposit and term will affect your rate.
What to do now: Use CDs to earn interest on your mid-term money. As rates fall, longer-term CDs may be your best option, while using other easy-access solutions for your shorter-term savings.
What the latest Federal Reserve move will mean for loans and mortgages
Now to the other side of the asset/liability ledger. This is where lower interest rates can work to your advantage.
Personal loans
Interest rates on personal loans have risen from 8.73% at the beginning of the Fed rate hikes in 2022 to 12.33% in August 2024, according to the latest data available. Now that the Fed is lowering rates, we can expect to see these interest rates slowly drift lower.
Student loans
Most federal loans have fixed interest rates, so Fed policy doesn't impact them. Private student loans may have a variable rate, and Fed rate hikes can be a factor.
To learn the interest rate on an existing loan, contact your lender or loan servicer.
Home mortgage loans
If you've been looking to buy a home in the past two years, you know this story: Home loan rates have soared. When the Fed rate hikes began, lenders were pricing 30-year fixed-rate mortgages around 4%, according to Freddie Mac.
They spiked to nearly 8% last fall, but home loan interest rates for 30-year fixed mortgages fell below 7% last December. Except for a bump above 7% in May, mortgage rates have stayed in the 6% range.
It took nearly 20 years for mortgage loan rates to fall from 7% in 2001 to an annual percentage rate under 3% in 2020. And homebuyers may not see lenders price home loan rates that low again anytime soon. The 50-year average for a 30-year fixed-rate mortgage is still well over 7%.
What to do now: As the cost of borrowing moves slowly lower, resist the urge to take on more debt or extend the term on existing loans. Monitor upcoming opportunities for mortgage refinancing.
Read more: How the Fed rate decision affects mortgage rates
How Fed interest rate moves impact credit cards
Credit card interest rates have moved from an average of just over 16% to well over 21% during the Federal Reserve's rate-raising cycle. With a shift to lower rates, we can look forward to some lower fees on credit card balances.
However, the relief will come gradually.
What to do now: Lower interest charges can give you the opportunity to reduce credit card debt faster. Prioritize paying off the credit cards you can — especially those with the highest interest charges — and consider balance transfers to lower interest rates and zero-interest credit card offers as your credit score allows. With good credit, a personal loan for credit card debt consolidation may be another option to consider.
How Fed interest rate moves impact your investments
The Federal Reserve was created following a banking crisis in 1907. Today, it is the glue that binds our diverse financial system together. Each Fed interest rate move is closely followed on Wall Street and can trigger a quick reaction within the capital markets.
Dig deeper: The stock market crash that brought us the Fed
Inflation and the jobs market
The Fed looks to control inflation with interest rate moves aimed at having a minimal impact on the jobs market. The tweaking of consumer demand raises or lowers the heat of consumer prices.
Read more: Jobs, inflation, and the Fed: How they're all related
Your 401(k), IRA, and taxable investments
How does all of this affect your investments? Some people avoid looking at their 401(k) in times of drastic market downturns. Others obsess about daily balances.
Something in between the two extremes is probably best: Regular maintenance with professional guidance as needed.
As the Fed lowers interest rates, businesses have greater access to cheaper capital. That encourages expansion, hiring, and often: stock performance. However, stocks in banks and the financial services industry may dip under profit pressure as their margins tighten.
That's why a proper mix of investments — called asset allocation — helps moderate the risk you take.
Read more: When the Fed lowers rates, how does it impact stocks?
