The Fed Just Cut Interest Rates. What Does that Mean for You?

KEY TAKEAWAYS

• The Federal Reserve cut its influential federal fund rates by 50 bps today. This is the first cut to the central bank's key interest rate since 2020.
• With the rate cut, borrowing costs for all kinds of loans should decrease.
• Hiring has slowed down over the past few months as high interest rates have started slowing the economy. Lower rates mean business loans are more affordable, and employers may be more encouraged to hire.
• While the rate cut will lower borrowing costs and increase hiring, savers will likely lose their high returns on different savings products.

The Federal Reserve delivered its first interest rate cut since 2020 Wednesday—and that has far-reaching effects on your wallet.

In their meeting this week, the central bank cut the influential federal fund rate by 50 bps reducing the range to 4.75%—5%. Before Wednesday, the Fed had kept its key interest rate in the range of 5.25%—5.5% for more than a year. The rate cut marks a shift toward ending of the central bank’s campaign to tame inflation, which flared first in 2021.

The federal funds rate is the target interest rate set by the Fed, which commercial banks use when they borrow and lend excess reserves to each other overnight. Because banks will now charge each other less to borrow money. They will, in turn, pass those changes on to customers.

This interest rate cut should help stimulate the economy and reduce rates on loans and credit cards. Here’s how that could affect you.

Debt Will Likely Be Cheaper

Interest rate hikes pushed up borrowing costs for all types of debt, including mortgages, credit cards, and car loans over the last two years. If you have taken out debt during that time, you may be able to get better rates in the wake of the Fed's rate cut.

A key example is mortgage rates, which have already decreased as the market prepared for a rate cut. Now that it's official, many experts believe rates will continue to fall, and financial planners say now may be the time for you to take advantage of lower refinancing rates. The same goes for other kinds of debt, including auto loans.

As consumers attempted to contend with inflation, credit card usage rose. That has left many struggling to pay back their debt as interest rates on credit cards have risen by seven percentage points since the Fed began its campaign of rising interest rates.

After Wednesday's cut, interest rates on credit cards will likely fall. If your rate is lowered, it will automatically be applied to your credit card, and you likely won't be notified. This doesn't happen immediately and may take more than a month to adjust.

However, you don't have to wait for your issuer to lower your interest rate to save money. Financial planners have suggested switching high-interest debt to lower-interest credit cards or personal loans. With a rate cut, consumers may find more options for a low-interest loan, they said.

Hiring Can Make a Comeback

Although high interest rates were meant to discourage borrowing and spending and subdue inflation, they have also slowed the economy and hurt the labor market. 

As business loans become more costly, employers have stalled hiring. The Department of Labor’s report on the job market earlier this month showed 142,000 jobs added in August, below the 161,000 economists predicted.

The jobs market has been under a microscope as the Federal Reserve has shifted its focus from fighting inflation to preventing layoffs. In August, the unemployment rate grew to a level that triggered a normally reliable recession indicator. Fed Chair Jerome Powell and other officials have expressed concerns about a weakening labor market, and officials indicated they were cutting interest rates in part to prevent further job losses.

With an interest rate cut, business borrowing costs will fall. The ability to borrow more cheaply will likely encourage employers to increase hiring.

Savers Will Lose Some of Their Returns

While an interest rate cut may decrease consumer costs, savers may not earn as much money.

Stocking away money in high-yield savings accounts or CDs was lucrative for savers who wanted to take advantage of high interest rates during the Fed's fight against inflation. For example, rates for a 6-month CD shot up after the Fed began hiking rates, getting as high as 6% in October 2023, according to research by Investopedia.

Wednesday's Fed decision will start lowering the amount of interest banks offer savers. While savings rates may not fall to where they were before the Fed began its campaign of interest rate hikes, they will generally follow the Fed's decisions in its upcoming meetings.

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