Fed Rate Cut: Impact on Savings, Loans, and Credit Cards

Long-awaited as it may be, the economic change has finally come. The Federal Reserve cut short-term interest rates by a large half-point on Wednesday, which could be good news for shoppers. Beginning in 2022, interest rates were raised 11 times to fight inflation. In August 2023, rates stayed the same. Since inflation dropped to 2.5% in August, which is close to the Federal Reserve’s goal of 2%, the central bank has decided to keep rates low. What does this change mean for your credit cards, bank accounts, CDs, and loans, though?

Figuring out how monetary policy works

The federal funds rate is set by the Federal Reserve and affects the cost of getting money across the business. Fed choices have an effect on savings, loans, and credit as they move through the financial system. These are the tools that the central bank uses to control inflation and boost economic growth. Now that the monetary policy is less strict, let’s look at what will happen next with your money.

Accounts for checking and savings

Checking and savings account profits are expected to go down when interest rates go down. Know this:

Accounts for checking

Checking accounts that earn interest already give very little money back, about 0.08% on average. Since the Fed cut rates, don’t think things will get much better here. The low interest rate is a trade-off for being able to get to your cash quickly, though, because these accounts are designed to be flexible.

Accounts for Savings

In August 2023, the average rate on traditional savings accounts at brick-and-mortar banks was only 0.46%. But yearly percentage yields (APY) on high-yield savings accounts were better, ranging from 4.25% to 5.25%. As banks get used to the Fed’s move, smart savers will need to look around for the best deals.

Accounts for money market funds

In the past few months, money market accounts also saw small rises, averaging around 0.64%. At the moment, high-yield money market accounts pay between 4.45% and 5.25%, but those rates are also likely to go down. As these returns start to change, keep a close eye on what your bank has to give.

Here’s what you can do now: For better rates, look into online banks and high-yield accounts. You can get the most out of your savings if you keep your short-term cash open.

CDs, or certificates of deposit,

CDs will also be affected by lower interest rates. The best CDs are currently giving back about 5.25% APY, but these rates are likely to go down once the Fed’s rate cut goes into effect. If you want to keep your savings safe for the next few months, you might want to lock in rates now, before they drop even more.

Here’s what you can do now: You can get better rates on longer-term CDs now if you have cash that you won’t need for a while. For short-term needs, look into other high-yield savings choices to keep your cash on hand and make interest at the same time.

Loans and home mortgages

The Fed’s rate cut could help people with personal loans, student loans, and home payments who are trying to borrow money.

Loans for individuals

Rates on personal loans went up to 11.92% in May 2024, but since the Federal Reserve is lowering rates, these costs should slowly go down. Personal loans can be easier for people to get if the costs of getting money are lower.

Loans for students

Federal student loan rates are usually set, but private loan rates can change depending on what the Fed does. In the coming months, people who have variable-rate student loans might be able to breathe easier.

Mortgage loans for homes

In the last two years, rising mortgage rates have made it hard for people to buy homes. Last fall, rates on 30-year fixed mortgages went up to almost 8%. Since then, they have begun to go down. At the moment, home loan rates are around 6%, and they could go down even more as the Federal Reserve lowers rates. However, it’s important to remember that interest rates this low (below 3%) probably won’t come back any time soon.

What You Can Do Now: If you want to buy a house or refinance, keep a close eye on rates. As rates go down, you may have more chances to get a mortgage that fits your budget.

Cards with credit

Rates on credit cards went from an average of 16% to over 21% during the Fed’s rate-hiking run. The good news is that people who have loads on their credit cards might feel better when interest rates go down. But it will take some time for this change to show up in credit card interest rates.

What You Can Do Now: While interest rates are still high, pay off your credit card debt as quickly as possible. To lower your debt, you might want to move your balances to cards with cheaper interest rates or no interest at all.

What the Fed’s move means for the economy as a whole

With this big rate cut, the Federal Reserve is taking a big step toward making it easier for people and businesses to borrow money. The goal is to add more cash to the banking system so that the economy can grow. Powell and the Fed are still keeping an eye on inflation, though, which makes it clear that future choices will depend on how the economy changes.

For now, people should be ready for lower rates on savings accounts and CDs. They should also take advantage of the fact that loans and mortgages might be cheaper. You should look over your financial plan again right now to make sure you’re getting the most out of this change in the economy.

This rate cut means that things are going to change in the business world. Smart shoppers should keep an eye on things, like loan rates, and be ready to take advantage of chances as they come up. Now is the time to plan your financial future, whether you want to pay off credit card debt, lock in CD rates, or refinance your home.