What the Fed's Rate Cut Means for Savers, Investors, Homeowners and More
The Federal Reserve lowered interest rates by a half point on Wednesday, setting off a chain reaction that will indirectly influence several parts of the U.S. economy — including your wallet.
Ahead of the announcement, it was unclear if the Fed would cut rates by 25 or 50 basis points, but officials ultimately chose the bolder path. It's likely an indication of some concern about weaker economic data and rising unemployment, though for some analysts the move came as a surprise.
"The Fed’s decision to go big is a unique move in history," Seema Shah, chief global strategist of Principal Asset Management, wrote in emailed commentary reacting to the news. "No financial crisis brewing, no asset price bubble bursting, no job losses, and an equity market that was already up some 18% year to date."
This interest rate cut is the first since 2020. In recent years, the Fed ratcheted up interest rates (and then held them steady) in order to curb excessive post-pandemic inflation. With price increases normalized — inflation is down to 2.5% — it's bringing rates back down to Earth. Though experts say it’ll likely take a while for everyday Americans to feel the full effects of the Fed’s decision, the central bank’s rate cuts will have far-reaching consequences, especially if they continue as expected throughout the rest of 2024 (and maybe into 2025).
The Fed's rate cut reduces the target range for the federal funds rate, or the rate at which banks lend each other money overnight, to 4.75% to 5%. And Fed officials expect an additional 50 basis points of cuts this year, according to newly released projections.
"This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%," Fed Chair Jerome Powell said at a Wednesday afternoon news conference.
By slashing rates, the Fed is making borrowing money less expensive, broadly making loans cheaper and saving less desirable. Here’s how lower interest rates could impact...
Find Your Actual Rate at Rocket Mortgage (NMLS #3030) Today!
View RatesSavers
While high interest rates have been a pain in many areas of people’s finances, they’ve been a boon for savers. That’s because when benchmark interest rates are high, so are the annual percentage yields (APYs) on deposit accounts like money market accounts, high-yield savings accounts and certificates of deposit (CDs).
With money market and high-yield savings accounts, banks can change the APY whenever they want on the money that’s already deposited in the account. The rates on these accounts are typically quickest to change when the Fed makes adjustments and are effective immediately.
On the other hand, you can lock in your rate with CDs, earning fixed interest on your deposit for a term usually between three months and five years. Lawrence Sprung, founder and wealth advisor at Mitlin Financial, previously told Money that CD rates tend to change seven to 10 days after the Fed changes rates, giving you a small window of time between now and roughly the end of September to lock in your rate.
Keep in mind, though, that if you need to access that money before the full term of the CD is complete, doing so can be onerous, and you’ll likely have to pay a penalty on the interest that has accrued.
Homeowners
According to Freddie Mac’s economic outlook, the average interest rate on outstanding (existing) mortgages is 4.1%. Meanwhile, someone considering refinancing their current loan is looking at a mortgage rate above 6%. The rate discrepancy has left many homeowners feeling trapped: It doesn’t make financial sense to sell their current home and buy a new one at a higher rate unless some kind of life event forces the issue (think: a new job or a divorce).
Alas, with the Federal Reserve only having announced one rate cut so far, the effect on mortgage rates may not be enough to move the needle significantly on home sales.
High rates over the last few years have also impacted a homeowner’s ability to refinance their homes. Freddie Mac reports that the level of refinancing activity during the first half of this year is at the lowest level since 1995, as rate and term refis simply aren’t attractive to most mortgage holders. However, the rate cut does mean that more people who purchased property at higher rates within the past year and a half could soon benefit from lower rates.
There is a bright side for homeowners, though. Thanks to the buying frenzy that took place during the pandemic, home prices have increased significantly. Homeowners are now sitting on record amounts of home equity — and lower borrowing costs will make tapping into that equity via a cash-out refinance, home equity loan or line of credit more affordable.
Homebuyers
The pandemic provided a once-in-a-lifetime opportunity for buyers. Record-low mortgage rates meant homeowners could trade up to bigger and more expensive homes, while first-time buyers suddenly found themselves able to afford home sooners than planned. But in 2022, mortgage rates started to rise, and they continue to stay well above the rates seen during the COVID-19 crisis. The result has been a buyer pullback as the combination of record-high home prices and elevated mortgage rates made home purchases less affordable.
While many expect Fed rate cuts to lure buyers back to the market, the comeback may not be as immediate as everyone hopes. Prior to the announcement of the half-point cut, rates had trended lower over the past four months as the expectation of a cut increased. Freddie Mac's current rate for a 30-year fixed-rate mortgage is 6.20%, a full percentage point lower than the 2024 high of 7.22% seen in May. However, home sales have remained sluggish despite lower borrowing costs.
Although a rate cut by the central bank will help keep mortgage rates moving lower, buyers are more likely to see a gradual improvement than an immediate one.
Job-seekers
The central banking system is largely known for its ability to hike or cut benchmark interest rates in an effort to control prices, but the Fed has another key mandate: to make sure the labor market is running smoothly. The unemployment rate remains low by historical standards at 4.2%, but its rise from the 2023 low of 3.4% has become a concern for the Federal Reserve.
For years, the Fed has been laser-focused on getting inflation under control. Now that’s largely been achieved, the rate cut announced Wednesday is a reflection of the agency’s commitment to the other arm of its economic scale — the job market.
Given that rate hikes typically damper the labor market, some economic experts say rate cuts could have the opposite effect. “By lowering interest rates, we could lower borrowing costs, encourage businesses to expand and hire more workers,” wrote researchers at the Roosevelt Institute, a liberal think tank.
Already, a record share of workers are itching for a new job. But they should keep in mind that the beginning of rate cuts does not necessarily mean jobs will be plentiful overnight.
Investors
For those whose investment horizons permit for market volatility, it’s once again time to consider higher-risk assets like stocks and ETFs. From March 2022 to July 2023, the Fed’s rate-hiking policy made low-risk assets — like bonds, Treasury bills, CDs and other cash alternatives — nearly as appealing as the equities market. But with the central bank enacting its first cut to the effective federal funds rate, safe-haven assets and high-yield savings products where investors have been stashing cash will begin to lose their appeal.
Wells Fargo’s head of global investment strategy, Paul Christopher, told CNBC in August that when the Fed begins cutting rates, the market could be looking at a watershed moment, the likes of which haven’t been seen since 1995. That year, when Alan Greenspan’s Fed slashed rates, the S&P 500 gained over 34% after posting a record 77 all-time highs.
Investors who overlook this opportunity and fail to deploy their cash positions could find themselves on the sidelines as the stock market potentially posts a historic finish to an already strong year. The S&P 500, the main stock index that tracks large U.S. companies, is up 19% year to date.
Borrowers
Interest rates for personal loans and credit cards soared in 2022 when the Fed hiked rates. These rates have been especially painful for consumers because many are relying more on credit cards to cope with high prices after several years of inflation. Americans paid over $100 billion in credit card interest in 2022, and total balances have surpassed $1 trillion.
The average credit card APR reached a record high last year of about 23%.
Credit card APRs should finally decrease now that the Fed is cutting benchmark rates, but just how much is unknown. Setting aside the increase in the prime rate, lenders have also “quietly and steadily” increased their profit margins on credit cards over the past decade, according to the Consumer Financial Protection Bureau. Hopefully, some relief is coming for cardholders, but many banks will likely continue to set high APRs even if the Fed enacts multiple rate cuts.
Drivers
Auto loan rates, like mortgage rates, are heavily dependent on the federal funds rate. With auto loan rates averaging 9.7% for new vehicles and 13.9% for used vehicles, car buyers have been committing to record-high monthly payments, while other shoppers have delayed purchases.
Rates should finally come back down as the Federal Reserve enacts cuts: “Once the fed funds rate is headed for neutral, the average rate on new auto loans is likely to end up between 7.5% and 8%,” Cox Automotive wrote in a recent report.
Officials have argued that high interest rates helped halt runaway inflation in car prices. As auto loan rates more than doubled due to rate hikes, the demand for new vehicles cooled and prices for new vehicles flattened out while used car prices actually fell significantly. If more car buyers start shopping again as interest rates come down, it wouldn’t be surprising to see car prices resume their normal rate of growth.
More from Money:
4 Smart Ways to Get Ready for the Upcoming Fed Rate Cuts
Economists Are Worried the Fed Has Waited Too Long to Lower Rates