From Loans to Jobs, Here's How the Fed Rate Cut May Affect Your Wallet
The Federal Reserve cut rates for the first time in 2025 on Wednesday in a move that will send shockwaves throughout the U.S. economy. And everyday consumers are all but certain to feel the impact.
On Wednesday, the Fed announced a new target federal funds rate of 4% to 4.25%, which amounts to a quarter-point cut from previous levels. The long-awaited adjustment is intended to help the central bank satisfy its dual mandate of maintaining low inflation and high employment amid signs of a weakening labor market.
By slashing rates, the Fed is effectively making borrowing money cheaper. The idea is that the cheaper it is to borrow, the more people will spend and the more jobs will be created. President Donald Trump, in particular, is likely to welcome this news, given that he's been demanding rate cuts for months (and been stymied as Fed policymakers have waited to see how his tariffs played out).
Although the effects on Americans' wallets will be muted at first, Wednesday's announcement matters because it starts to shift several big-picture financial trends — and likely will be followed by additional rate cuts in the coming months.
Here's what to know if you're...
…saving money
Although the Fed doesn’t directly set rates on consumer products like high-yield savings accounts, certificates of deposit (CDs) and money market accounts, its policies have ripple effects on what banks pay out. When the Fed cuts the federal funds rate, banks generally lower the annual percentage yields, or APYs, on their savings and other deposit accounts, too.
For the past few years, savers enjoyed high returns as the Fed raised rates repeatedly to rein in inflation, pushing APYs on some deposit accounts to historic highs. Now, with the Fed's easing, savings rates are likely to start trending lower (just as the Fed’s 11 rate hikes in 2022 and 2023 pushed deposit rates up).
Fortunately, even with a cut, savers can still find competitive rates. Many top high-yield savings accounts and CDs offer rates more than 10 times the national average, with some of the best high-yield savings accounts and money market accounts offering rates over 4%. CDs let savers lock in a rate for a fixed term, shielding them if rates drop further. Since banks adjust rates differently, changes may not be immediate, giving savers a window to lock in strong rates while they’re still around.
…borrowing money
Rate cuts may be bad news for savers seeking high yields, but the opposite is true for borrowers. They benefit consumers who’ve dealt with sky-high rates on credit cards, personal loans and auto loans over the past few years.
That said, the relationship between the Fed’s benchmark interest rate and the annual percentage rate, or APR, offered on various loans isn’t perfectly linear, so you shouldn’t expect rates to fall immediately — or uniformly, for that matter. When the Fed approved a series of rate cuts in 2024, interest rates on credit cards were particularly sticky. The average dropped from a record high of 23% to about 22% so far this year, according to the Federal Reserve — but that’s still about four percentage points above what banks were charging in 2022.
For other products, lenders may have already baked in the prospect of a lower federal funds rate. Private student loan companies, for example, dropped their starting APR offers over the summer to some of the lowest rates seen in years, so it’s unlikely they’ll fall much more this year.
Generally speaking, though, if you need to borrow money to buy a car, complete a home renovation project or pay off higher-interest debt, Wednesday's rate cut — and the possibility of additional ones later this year — improves your shot of having access to more affordable financing.
…invested in the stock market
Now that the Fed has slashed its benchmark interest rate, there are two likely outcomes investors will see in the equities market.
First, dividend-paying stocks from companies with stable cash flows should see an influx as investors vacate fixed income due to lower yields on Treasurys, CDs and bonds. Investors may want to keep an eye on Dividend Aristocrats and Dividend Kings — stocks that have increased their dividend payouts for 25 and 50 consecutive years, respectively, and that are safe bets to see inflows down the stretch.
Second, the financials sector — which is already having a strong year — will enjoy additional tailwinds. Lower rates will incentivize borrowing and refinancing, reducing corporations’ capital expenditure costs — purchases of long-term assets like real estate, machinery, vehicles and IT infrastructure — and inviting homeowners to restructure mortgage debts on friendlier terms. Subindex exchange-traded funds, such as the Financial Select Sector SPDR Fund (XLF) and Vanguard Financials Index Fund ETF (VFH), are broad, safe plays to gain exposure.
…trying to buy a house
The rate cut is unlikely to significantly move the needle on mortgage rates in the near term. That's not to say, however, that prospective homebuyers aren't seeing some relief from the affordability crunch they've been trapped in for the past two years. The expectation of a cut alone had an impact on financing costs, as mortgage lenders were lowering their rates in anticipation of Wednesday's announcement.
Buyers shopping around for a home loan are finding mortgage rates that are more than a quarter-point lower than they were just a month ago — and more than half a point lower than they were at the start of June. These lower rates are resulting in a not-insignificant increase in a buyer's purchasing power. According to online brokerage Redfin, would-be homeowners have added more than $22,000 to their buying budgets over the summer. Any additional decreases in rates, however small, are likely to be welcome.
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View Rates…selling or refinancing a house
Homebuyers aren't the only ones who stand to benefit from the recent downward trend in rates. According to housing experts, homeowners who feel locked in by the ultra-low mortgage rates they snagged during the pandemic could feel more comfortable putting their homes on the market — especially if rates continue to decrease and eventually slip below 6%. The rate trade-off for a 5% or a low 6% rate could be more palatable compared to a 7%-plus one.
Homeowners who can benefit from the decline in rates, as well as any future decreases, include those who purchased homes over the past two years (when rates averaged close to or above 7%). A homeowner who owes $400,000 on a mortgage at a 7% rate, for example, would be able to shave about $145 off their monthly payment by refinancing their current loan at a 6.35% rate.
…searching for a job
The labor market has puttered to a halt, and the Fed rate cut could be interpreted as a lifeline to workers despite inflation drifting away from the central bank’s preferred 2% rate. In other words, this week's decision wasn't made because we have good news on inflation — it’s "because we have bad news on employment," Claudia Sahm, chief economist at New Century Advisors and a former Fed economist, told Yahoo! Finance.
Job seekers already know this. Even though the unemployment rate is 4.3% — low by historical standards — it’s been getting increasingly difficult for folks to find a gig. According to the Department of Labor, the average duration of unemployment reached 24.5 weeks in August, the highest reading since April 2022. Meanwhile, about 1 in 4 unemployed people have been out of work for at least 27 weeks (that's about six months).
By cutting interest rates, the Fed is trying to make it a little easier for businesses to hire more workers because, in theory, a smaller portion of their budgets would go toward debt, thus freeing up money for staff. A rate cut also aims to stimulate consumer spending, which supports economic growth and job creation.
All of that won’t happen overnight, but it could start the thaw of the hiring freeze.
…buying a car
Auto loan rates usually decline when the Federal Reserve cuts interest rates. That's a good thing for drivers, given that car loan rates are hovering around 6.7% for new vehicle financing and 11.9% for used vehicle financing, according to Experian. Those rates are up from 4.3% and 8.6%, respectively, in 2022.
High interest rates are part of the reason car buyers are committing to record monthly payments of over $750 on average for new cars. People with lower credit scores have particularly struggled to qualify for affordable car loans in recent years.
Experts say this Fed cut should lead to lower auto loan rates, making car ownership slightly more affordable — at least on the financing piece. Gradually, that would bring shoppers back into the market.
"Interest rates for both new and used vehicles remain above historic norms, so a modest Fed rate cut won't dramatically slash monthly payments for consumers — but it does boost overall buyer sentiment," Jessica Caldwell, head of insights at Edmunds, said in a note this week.
Combine lower financing costs with "with sales events like model-year closeouts, Black Friday deals, and year-end promotions," and car buying could ramp up moving toward the end of 2025, Caldwell said.
…retired
While retirees face the same pros and cons outlined above, the downsides are often more pronounced since most retirees are trying to pay down debt and boost — or, at least, maintain — their savings amid rising prices.
“Whenever you lower rates, that kind of fuels the money supply a little bit more, which can result in increased inflation,” says John Jones, a financial planner with Heritage Financial in Newberry, Florida. He adds that he's particularly concerned about this side effect, given the possible inflationary pressures that could come from the Republicans' massive spending bill.
What’s more, retirees’ portfolios tend to be more conservative than younger investors, meaning they have more tied up in fixed-income products (like bonds, Treasurys and CDs) where yields are likely to dip following the rate cut. Don’t make any panicked changes to your investments, though: You won’t see a dramatic effect on those products right away, as it will take time for the markets to adjust.
There will still be places to find solid yields in the bond market, including in high-quality corporate bonds and intermediate-term bonds, according to Barron’s. But retirees shouldn’t overlook the power of stocks in a declining interest-rate environment, either. If borrowing rates fall, companies can take on debt to expand business and boost profits, thereby improving stock performance.
As always, it's important to have a plan that incorporates your goals and risk tolerance and doesn’t change simply because of the Fed’s actions or other news events, Jones says. The key is balancing the "what ifs that may or may not ever come, so you're not having too much on the sideline lagging behind inflation and you also have enough [assets] exposed to growth to keep up with the cost of everything and to maintain your standard of living and wealth long term.”
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