Newsletter
Key Points:
-
The Federal Reserve’s rate cut lowers borrowing costs making it an ideal time to refinance high-interest debt or secure more favorable loan terms.
-
With interest rates on savings accounts and CDs expected to drop, savers should explore locking in a high-rate CD.
-
Adapt and take advantage of potential opportunities by refinancing debt, investing in assets that perform well in low-rate environments.
Yesterday (September 18, 2024), the Federal Reserve slashed interest rates by 0.5%, with more cuts expected. The last rate cut was in March 2020, during the pandemic; this time, the focus is on easing borrowing costs after inflation sent them soaring. So, what does this rate cut mean for your finances? Let’s break down the why, and how this impacts your savings, loans, credit cards, and how you can make informed financial adjustments.
Why Did the Federal Reserve Cuts Rates?
The Federal Reserve cuts interest rates to stimulate economic growth when inflation cools or when the economy shows signs of slowing. By lowering rates, the Fed encourages borrowing and spending as borrowing costs become cheaper for consumers and businesses.
In this case, after several years of steady rate hikes to curb inflation, the Fed cut the federal funds rate by 50 basis points, lowering it to a target of 4.75%-5.0%. This move aims to ease financial conditions for households and companies struggling with elevated borrowing costs.
A lower interest rate environment offers opportunities for borrowers and investors, yet it presents challenges for savers.
Rate cuts help reduce the cost of loans, such as mortgages and personal loans, and provide much-needed relief for consumers who may have delayed large purchases due to high borrowing costs. Businesses also benefit, as cheaper credit helps them finance expansions or manage existing debt.
The Fed uses rate cuts to spark economic activity, especially when inflation appears under control, as it is now. With inflation at a more manageable 2.5% in August 2024, compared to its peak of 9.1% in June 2022, the Federal Open Market Committee (FOMC) felt it was the right time to reduce rates.
While the Fed is designed to be an apolitical entity, and its monetary policy decisions are supposed to be made independently of political influence, the timing of this rate cut—less than seven weeks before the 2024 U.S. presidential election—is impossible to ignore. Historically, the Fed has made more rate adjustments during election years than not, often sparking debate about whether these moves are influenced by political pressure or electoral concerns. Still, the proximity to a major election continues to raise questions about whether other factors are at play beyond purely economic considerations.
Impact of Rate Cuts on Savings & Investments
When the Federal Reserve cuts interest rates, it doesn’t just impact borrowing; it also significantly affects savings. Interest rates on savings accounts, Certificates of Deposit (CDs), and other savings products are closely tied to the federal funds rate. As rates drop, savers' returns on these products tend to decrease. This shift can affect both short-term savings strategies, such as emergency funds, and long-term savings vehicles, like CDs. While consumers generally welcome lower borrowing costs, savers may need to adjust their strategy to maximize returns in a falling-rate environment.
Here’s a closer look at how specific savings outlets are affected:
High-Yield Savings Accounts (HYSA)
High-yield savings accounts have been popular in recent years, offering annual percentage yields (APYs) that significantly outpace traditional savings accounts. However, with the Fed lowering rates, the returns on HYSAs are expected to drop. Currently, some HYSAs are offering rates as high as 5%, but these rates will likely decrease as the economic impact of the Fed’s cut takes hold. Savvy savers should keep a close eye on interest rate trends and may need to shop around for the best available rates. While rates will fall, high-yield savings accounts may still be useful for short-term goals or emergency funds due to their liquidity and ease of access.
Certificates of Deposit (CDs)
Certificates of Deposit, or CDs, are another savings vehicle likely to see lower returns as interest rates fall. CDs typically offer fixed interest rates for a set term, but the APYs offered on new CDs will likely decline in the near future as the Fed plans to continue to lower rates. This means that if you’re considering a CD, it may be wise to lock in a high-rate CD now before further cuts reduce available returns.
Money Market Accounts (MMAs)
Money market accounts often offer higher interest rates than standard savings accounts, but like HYSAs, their returns are tied to the federal funds rate. As the Fed cuts rates, returns on MMAs will decline. However, these accounts still provide a solid option for savers who want to maintain liquidity while earning slightly better returns than traditional savings accounts. They are often seen as a good middle-ground between savings accounts and longer-term products like CDs, particularly for larger deposits that don’t need to be immediately accessible.
Investments
While savings accounts and CDs may offer lower returns following a rate cut, other investment options might benefit.
Bonds, for example, tend to perform better in a falling-rate environment because bond prices and interest rates move inversely. Bond prices typically rise when rates drop, making them a more attractive option for investors seeking relatively safe returns.
Dividend-paying stocks and real estate investments may also perform better during periods of lower interest rates, as borrowing costs decrease and companies have more capital to grow their business.
Overall, while a Fed rate cut may reduce returns for savers, there are still ways to maximize savings by exploring different accounts and monitoring the best available rates. Savers may need to be more proactive in shopping for competitive rates, mainly if they rely on interest income.
Personal Loan Providers
Impact of Rate Cuts on Loans
When the Federal Reserve lowers interest rates, the immediate beneficiaries are typically borrowers. Lower rates make borrowing more affordable, allowing consumers and businesses to take on new loans or refinance existing ones at more favorable terms. Rate cuts reduce the cost of borrowing for major purchases, such as homes, cars, or personal expenses, by lowering the interest rates lenders charge on various loan products. However, the extent of these benefits depends on the type of loan and whether the rate is fixed or variable. While a rate cut can offer relief to some borrowers, not all loans will see immediate reductions in interest rates.
Today, it has become slightly cheaper to take out a federal student loan.
Here’s how the rate cut affects different types of loans:
Mortgages
Mortgage rates are closely tied to the federal funds rate, but they don’t always move in lockstep. So, how is the mortgage rate affected? The answer depends on whether you have a fixed-rate or adjustable-rate mortgage or are planning to buy a house.
For most, the short answer is not immediately, as mortgage rates usually react prior to rate adjustments. Mortgages have already come to terms with the idea that the Fed rate is coming down, and we’ve already seen a 30-year fixed-rate mortgage drop to almost 6%. Luckily, the trend is likely to continue, given the Summary of Economic Projections issued by the Fed.
Rates on adjustable-rate mortgages (ARMs) and. This presents an opportunity for homeowners with adjustable-rate loans to see lower monthly payments.
Moreover, refinancing a mortgage during a rate-cutting cycle can lead to significant long-term savings. Homeowners looking to refinance their high-interest-rate loans may benefit if mortgage rates drop by another half percent. Still, they should weigh the costs of refinancing, such as closing fees, against the potential savings (CNBC).
The best news is for potential homebuyers. Now may be a good time to lock in a low rate as new mortgages generally decrease in response to a Fed rate cut. This market is difficult to predict, and nobody knows precisely what will happen to home prices with the Fed’s anticipated plan to reach an interest rate of around 3% by 2026.
Personal Loans
Personal loans are generally fixed-rate loans, meaning borrowers won’t see their rates change due to a Fed rate cut. However, for new borrowers, a rate cut can result in lower starting interest rates, making personal loans more affordable. This is particularly true for borrowers with good to excellent credit, who benefit most from favorable loan terms.
Unfortunately, personal loan rates tend to respond slowly to Fed moves, especially compared to other loans, so borrowers might not see significant immediate reductions. If you’re considering taking out a personal loan, it’s still important to shop around and compare lenders to get the best possible deal, even as rates begin to drop.
Student Loans
Those with current federal student loans are not directly impacted by Fed rate cuts because they have fixed interest rates set by the government. Therefore, whatever the interest rate was when you applied for your loans is what you’ll incur.
However, private student loans can be affected, especially variable-rate loans. When the Fed lowers rates, borrowers with variable-rate student loans could see their interest rates decrease, leading to lower monthly payments.
Refinancing may be a good option for borrowers with fixed-rate private student loans if they want to take advantage of lower rates. However, it’s important to consider the risks of refinancing federal loans into private ones, as you could lose access to federal benefits.
The good news is for those students looking to go to college. Today, it has become slightly cheaper to take out a federal student loan.
Overall, while a Fed rate cut can make borrowing more affordable, the benefits will vary depending on the type of loan and whether it has a fixed or variable rate. Borrowers should stay informed and consider refinancing options or locking in lower rates if they are in the market for a new loan. With continued cuts on the horizon, timing can be key to maximizing savings on interest payments.
Certificate of Deposit Related Articles
A Complete Guide to Money Market Accounts
Top 12 Passive Income Streams to Boost Your Earnings in 2024
5 Best Investments in 2024: Here’s Where to Put Your Money
Invest Like a Pro: How To Calculate the Current Yield of a Bond
Impact of Rate Cuts on Credit Cards
Credit card interest rates, also known as APRs (Annual Percentage Rates), are directly influenced by the Federal Reserve's interest rate changes. Most credit cards carry variable interest rates, which means that as the Fed lowers its rates, cardholders could see a reduction in the interest they pay on outstanding balances. However, these changes don’t happen overnight, and the degree to which credit card rates drop can vary depending on the issuer and the cardholder's credit profile.
Here's how the Fed's recent rate cut affects credit cards:
Credit Card APRs
Most credit cards have variable APRs that are linked to the prime rate, which is, in turn, influenced by the federal funds rate. When the Fed cuts rates, the prime rate typically follows, which can lower the APR on your credit card. For cardholders carrying a balance, this means slightly lower interest charges over time.
However, the reduction might not be as substantial or immediate as some borrowers hope, and even with a rate cut, the average credit card APR remains high. Currently, the average credit card interest rate is almost 28%, and while it may decline after the Fed's recent moves, it’s unlikely to drop drastically in the short term.
Balance Transfer Cards
Lower rates can make balance transfer offers more attractive for individuals looking to consolidate credit card debt. Many balance transfer cards offer 0% introductory APRs for a limited period, giving cardholders an opportunity to pay down their balance without accruing additional interest.
With a rate cut, card issuers may offer more competitive balance transfer deals, making it an ideal time to consider moving high-interest debt onto a low- or no-interest card. However, borrowers should be mindful of transfer fees, which can range from 3% to 5%. Borrowers should also ensure they can pay off the balance before the promotional period ends.
Credit Card Debt Management
For those already carrying a high balance on their credit cards, a Fed rate cut offers some relief in the form of lower interest charges on their outstanding debt. While the lower rate adjustments will be incremental, every percentage point matters when it comes to reducing the overall cost of carrying a balance.
This can be a good opportunity for cardholders to focus on paying down debt, especially if they can take advantage of lower APRs. Additionally, now might be a good time to explore debt consolidation loans or balance transfer options, both of which could offer more favorable terms in the current lower-rate environment.
New Credit Card Offers
As the Fed lowers rates, credit card issuers may offer more enticing deals for new cardholders, such as lower APRs or enhanced rewards programs. For consumers with good to excellent credit, this can be an opportune time to apply for a new credit card with better terms, whether they’re looking for lower interest rates, balance transfer offers, or enhanced rewards. However, always compare different offers and read the fine print, as fees and introductory terms vary significantly between cards.
Overall, while a Fed rate cut offers some relief to credit card holders, the impact for most will be gradual and not as dramatic as with other loan types. For those carrying significant credit card debt, now is a good time to explore debt reduction strategies, including balance transfers or debt consolidation.
Best Mortgage Refi Providers
- Dedicated to serving minorities
- Customizable mortgages for a range of credit scores
Smart Strategies for Adapting to the Rate Cut
With the Federal Reserve lowering interest rates, consumers have an opportunity to reassess their financial strategies. Whether you’re managing debt, considering new investments, or looking to optimize savings, adapting to a lower interest rate environment requires careful planning.
While lower borrowing costs are beneficial, reduced interest on savings accounts means that savers must look for new ways to grow their money.
Here are some smart financial moves to make the most of the current economic landscape:
- Refinance high-interest debt,
- Reduce your credit card debt,
- Consider investing in assets that historically perform well in low-rate environments,
- Adjust your savings strategy,
- Responsibly time major purchases,
- Stay informed, this is just the beginning.
It’s important to stay proactive and adjust your financial strategies...
Refinance High-Interest Debt
One of the most immediate benefits of a rate cut is the potential to refinance existing loans at a lower rate. If you have a mortgage, personal loan, or student loan with a higher interest rate, refinancing can help reduce your monthly payments and the total interest paid over the life of the loan.
Mortgage rates will likely drop further with the Fed's plan to continue cutting rates. This makes it an ideal time for homeowners to consider refinancing. Remember that refinancing comes with closing costs and fees, so it’s important to calculate whether the savings outweigh these expenses.
Focus on Reducing Credit Card Debt
Lower interest rates provide a good opportunity to tackle credit card debt aggressively. While the impact of the Fed’s cut on credit card APRs may be gradual, even a small reduction in interest rates can lead to savings on interest payments, especially for those carrying a large balance.
Consider taking advantage of balance transfer offers with 0% APR or using a personal loan to consolidate high-interest debt. This can help reduce the interest you pay over time and allow you to focus on paying down your debt faster.
Invest in Assets That Perform Well in Low-Rate Environments
Rate cuts tend to positively impact certain types of investments, particularly bonds and dividend-paying stocks. As interest rates fall, bond prices rise, making them a more attractive investment for those seeking stability and consistent returns.
Additionally, dividend stocks and real estate investments often perform well in a low-interest environment, as companies have more capital for growth and borrowing costs decrease.
Investors should consider diversifying their portfolio to include these types of assets, which can provide steady returns while rates remain low.
Adjust Savings Strategies
With interest rates on savings accounts and CDs set to drop, savers must be proactive about maximizing returns. High-yield savings accounts (HYSAs) will still offer better returns than traditional savings accounts, but the rates will likely fall. Consider locking in a competitive rate on a term CD before further cuts reduce returns. Alternatively, if you need liquidity, explore other savings vehicles, such as money market accounts, which can provide slightly higher yields while still offering access to your funds.
Consider Timing for Major Purchases
Lower interest rates mean borrowing costs for big-ticket items like homes or cars will decrease. If you’re in the market for a new home or vehicle, it may be worth it to consider purchasing while rates are low.
Remember to be cautious about over-leveraging yourself, even with lower rates. The temptation to take on cheaper debt can lead to financial strain if rates increase again or your financial situation changes.
Monitor the Fed’s Next Moves
With the Federal Reserve signaling that more rate cuts may be on the horizon, staying informed about future changes is crucial. Rate cuts can impact everything from your savings strategy to your debt repayment plan, so it’s important to stay flexible and adjust your financial goals as needed. Keep an eye on the economic outlook and the Fed’s decisions, as these will influence market conditions and borrowing costs over the next several months.
In summary, a lower interest rate environment offers opportunities for borrowers and investors, yet it presents challenges for savers. By strategically refinancing debt, optimizing savings, and adjusting your investment approach, you can make the most of the Federal Reserve’s rate cuts and protect your financial future.
Conclusion: Making the Most of Lower Rates
The purpose of cutting interest rates is to steer the economy in a more favorable direction. It’s a delicate balancing game as the Federal Reserve’s recent rate cut presents opportunities and challenges for personal finances.
Borrowers can take advantage of lower interest rates by refinancing high-cost loans, exploring balance transfers, or locking in favorable rates on new loans. Savers, however, may need to adapt to lower returns by seeking out high-yield savings accounts or considering alternative investments, such as bonds and dividend-paying stocks, which tend to perform better in low-rate environments.
It’s important to stay proactive and adjust your financial strategies, whether that means reducing debt, reassessing your savings approach, or capitalizing on investment opportunities.
While rate cuts are intended to stimulate the economy, they may also have broader implications. If cuts are followed by prolonged economic weakness or the economy tips into recession, stocks may suffer.
Although rate cuts often signal concerns about the current economic outlook, savvy investors may want to consider how these cuts could stimulate long-term economic growth. With more rate changes potentially on the horizon, staying informed and flexible is key to navigating the evolving financial landscape.
Frequently Asked Questions
Why does the Fed cut interest rates?
The Fed cuts interest rates to stimulate the economy during periods of slow growth or low inflation. Lower rates encourage borrowing and investment by making loans cheaper, which helps boost economic activity.
Is a rate cut good or bad for the economy?
A rate cut is generally seen as good for the economy because it lowers borrowing costs, encourages spending, and stimulates economic growth. However, it can also signal that the economy is slowing down, which may raise concerns about longer-term stability.
Can rate cuts lead to further inflation?
Yes, prolonged low interest rates can lead to inflation if economic growth accelerates too quickly. The Fed must balance rate cuts to stimulate growth without causing prices to rise too rapidly.
Article Topics
Certificate of Deposit
Will is an expatriate from Arizona, USA, who studied Political Science at Arizona State University. As a passionate personal finance enthusiast, he combines his expertise with a keen interest in current events to create engaging and insightful financial content. Outside of his professional pursuits, Will enjoys the nostalgia of old-school video games, adding a unique touch to his multifaceted profile.
