What Does the Latest Fed Rate Cut Mean for You?
The Federal Reserve announced on Wednesday it would cut its benchmark interest rate by 50 basis points . This marks the first cut in borrowing costs since the pandemic began in March 2020 as part of the central bank’s response to easing inflation pressures. Prior to this latest cut, the Fed had hiked rates 11 times in a row, peaking at an annualized rate of 9.1% in June 2022.
The federal funds rate is now in the range of 4.75% to 5%, which provides lower credit card and personal loan rates across the board. While the federal funds rate is intended to set what banks charge each other, it applies to everything from mortgages to student loans. If you’re planning to apply for a credit card, home loan, or car loan soon, here’s how the latest interest rate cut will affect your life.
What does the Fed rate cut mean right now?
While a half-percent rate cut (that is, 50 basis points) would certainly reduce borrowing costs, it would not bring radical relief. Unfortunately, you shouldn’t expect more than a few dollars on most loan payments each month.
Credit cards
As such, credit card holders can expect their annual percentage rates (APR) to drop within one to two billing cycles. However, with a $5,000 balance at a rate slightly lower than the current 20.78% , that would add up to a few dollars off the monthly interest payments. Aside from this news, perhaps the easiest way to lower your credit card interest rate? Just ask .
Loan rates
Auto, student and many personal loans are often fixed. However, the rate cuts mean they will likely become more affordable almost immediately. Existing adjustable rate personal loans could also see interest rates decline. Likewise, car buyers can expect better auto loan terms in the coming weeks as lenders adjust their rates in response to the Fed’s decision.
Savings accounts
Unfortunately for savers, interest earned on savings accounts and certificates of deposit (CDs) could decline , possibly within days or weeks of the Fed’s announcement. If you’re interested in making the most of multiple savings accounts, Nerdwallet has a good selection of online banks you can choose from here .
What does lower rates mean in the long term?
While some of the effects of rate cuts will be almost immediate, others will take time to materialize.
Mortgage
Although the Fed does not directly set mortgage rates, its decisions influence them. Mortgage rates are expected to decline in the coming months, but the adjustment may be gradual. For example, fixed-rate mortgages are more closely tied to the 10-year Treasury yield and could take several weeks or months to fully reflect the rate decline. With adjustable rate mortgages (ARMs), homeowners could see lower rates on the next reset date, which varies depending on the terms of the loan. Likewise, HELOC rates , which are typically variable, should decline within a settlement cycle or two, making home equity borrowing more affordable.
Student loans
Federal student loan rates are set annually based on the 10-year Treasury yield and will not be affected immediately. However, as with the personal loans described above, private student loan rates may decline for new borrowers and those with adjustable rate loans.
Wider economic impact
In theory, lower interest rates encourage consumers and businesses to borrow and spend more, potentially boosting economic growth. Lower interest rates often force investors to seek higher yields in riskier assets, potentially boosting stock markets. Additionally, as mortgage rates decline, the housing market could see increased activity as more people are able to afford a home or refinance their existing mortgages.
It’s important to note that while the Fed’s rate cuts determine the overall direction of interest rates, individual lenders ultimately determine their own rates based on various factors, including credit rating, lending terms and market conditions.
As the effects of these rate cuts unfold, be sure to stay informed and consider how these changes may impact their financial decisions—from refinancing existing debt to timing large purchases or investments.