The Federal Reserve cut interest rates at its last policy meeting and is gearing up for another rate reduction this week.
Sure, there are plenty of other important things to pay attention to. But interest rates have a direct impact on your finances.
Interest is the cost you pay to borrow money, whether that’s through a loan or credit card. Lower interest rates mean the percentage you owe on your outstanding debt is smaller.
Lower interest rates can also reduce the amount a financial institution or bank pays you, i.e., what you earn, for investing your money, like with a savings account.
The Fed made a 0.5% rate cut on Sept. 18 and is projecting a smaller 0.25% cut on Nov. 7. Though one single interest rate cut won’t immediately affect your wallet (nor drastically shake up the economy at large), the government’s monetary policy and overall economic outlook will impact your money over the long term.
Here’s a quick primer on interest rates and what you need to know ahead of Thursday’s Fed decision.
The Fed and interest rates
The Fed meets eight times a year to assess the economy’s health and set monetary policy, primarily through changes to the federal funds rate, the benchmark interest rate used by US banks to lend or borrow money to each other overnight.
Although the Fed doesn’t directly set the percentage we owe on our credit cards and mortgages, its policies have a ripple effect on the everyday consumer.
Imagine a situation where the financial institutions and banks make up an orchestra and the Fed is the conductor, directing the markets and controlling the money supply. In this case, we’re all in the audience watching, and we could end up with a little bit less or slightly more money in our pockets.
When the central bank “maestro” decides to increase the federal funds rate, many banks tend to increase their interest rates. This can make our debt more expensive (e.g., a 22% credit card APR vs. a 17% APR), but it can also lead to higher savings yields (e.g., a 5% APY vs. a 2% APY).
When the Fed lowers rates, as it did in September and will likely do again this week, banks tend to drop their interest rates, too. That can make our debt slightly less cumbersome, but we won’t get as high of a yield on our savings.
The battle between inflation and the job market
Financial experts and market watchers spend a lot of time predicting whether the Fed will hike or cut interest rates based on the direction of the economy, with a special focus on inflation and the labor market.
When inflation is high and the economy is in overdrive, the Fed tries to pump the brakes by discouraging borrowing. It does this by setting higher interest rates and decreasing the money supply. Since March 2022, the Fed raised the federal funds rate 11 times, which helped slow down record-high price growth.
However, the Fed takes a risk if it brings inflation down too much. Any major, rapid decline in economic activity can cause a major spike in joblessness, leading to a recession. You might hear the phrase “soft landing,” which refers to the balancing act of keeping inflation in check and unemployment low.
The economy can’t be too hot or too cold. Like the porridge in Goldilocks, it has to be just right.
Because current inflation data is on pace with the Fed’s expectations, we’re likely to start seeing a series of rate cuts through the rest of 2024 and into 2025.
What another Fed rate cut could mean for your money
When it comes to your money, the Fed’s rate decisions affect your credit card debt and whether you can afford a mortgage on a house. Interest rates even influence how much annual percentage yield you earn from your savings account.
Here’s what another rate cut could mean for credit card APRs, mortgage rates and savings rates.
🏦 Credit card APRs
Lowering the federal funds rate can cause credit card issuers to decrease the price of credit for cardholders, meaning you would be charged less interest on your outstanding balance each month. You won’t feel the effects right away, and every issuer has different rules about changing annual percentage rates. However, if the Fed changes the federal funds rate at its policy meeting this week, you might notice your APR adjust within one to two billing cycles.
“Credit card debt is typically very expensive, and that won’t change even if the Fed makes multiple interest rate cuts this year. So don’t wait for the Fed to make a move — prioritize paying off high-interest debt now. If you get an offer for an introductory 0% APR credit card or can apply for a personal loan with a lower APR, consider moving your debt so you can avoid paying any more interest than you have to.” — Tiffany Connors, CNET Money editor
🏦 Mortgage rates
The Fed’s decisions impact overall borrowing costs and financial conditions, which influence the housing market and home loan rates, even though it’s not a 1-to-1 relationship. For example, since the Fed started its series of rate hikes in March 2022, mortgage rates soared, reaching a peak last fall. Though home loan rates move up and down every day and are influenced by multiple factors, they remain high, keeping homebuyers out of the market.
“The Fed doesn’t directly set mortgage rates. In fact, mortgage rates increased significantly after the Fed lowered rates by 0.5% in September due to strong economic data and political uncertainty. A 0.25% cut this month won’t immediately result in lower mortgage rates either. That said, ongoing rate cuts through next year, combined with weaker economic data, still point to a long-term downward trend for mortgage rates. It just won’t happen as quickly as anyone would like.” — Katherine Watt, CNET Money housing reporter
🏦 Savings rates
Savings rates are variable and move in lockstep with the federal funds rate, so your APY will likely go down following another rate cut. When the Fed started raising rates, many banks increased their APYs for traditional and high-yield savings accounts, giving account holders bigger returns on their deposits. Just remember that not all banks are created equal, and we regularly track the best high-yield savings accounts and certificates of deposits at CNET.
“We’ve seen savings and CD rates fall since the Fed’s September rate cut, and this trend is likely to continue if the Fed issues another cut this week. So, now’s the time to maximize your earnings by opening a high-yield savings account or CD. The longer you wait, the lower your earning potential could be.” — Kelly Ernst, CNET Money editor
What’s next for the Fed’s interest rate cuts
Experts say we can anticipate an ongoing series of rate cuts over the next 12 months. However, market watchers and economists usually have varying opinions about the Fed’s monetary policy. All we can do is make a rough speculation on when interest rates will drop and by how much.
Keep following CNET for Fed Day coverage. The decisions you make with your money are personal, but we’re here to help guide you.