Today’s Interest Rate Cut: How the Federal Reserve Affects Your Wallet
this Fed cuts interest rates It rose 0.25% at the end of today’s policy meeting. However, financing rates are likely to remain high for some time because according to Federal Reserve Press Release“, “The economic outlook is uncertain. ”
Maybe you don’t want to hear about interest rates during the holidays. But now is a time when many of us are thinking about spending and borrowing money.
How the Fed’s interest rate decisions affect you credit card debt and whether you can afford a car loan or mortgage. How much do interest rates even affect annual rate of return you from your savings account.
although A single interest rate cut Rather than directly affecting your finances (nor shaking the economy immediately), government monetary policy and the overall economic outlook can affect your money in the long term.
Here’s a quick primer on interest rates and what you need to know about today’s Fed decision.
How the Fed sets interest rates
Interest is the cost you pay to borrow money, whether through a loan or credit card. A lower interest rate means you owe a smaller percentage of your outstanding debt. A lower interest rate can also reduce the amount a financial institution or bank pays you – your income invest your moneyjust like a savings account.
The Fed meets eight times a year to assess the health of the economy and set monetary policy, primarily by changing the federal funds rate, the benchmark rate for overnight lending by U.S. banks.
Although the Fed does not directly set the percentage of debt we owe credit card and mortgage loanwhose policies have ripple effects on everyday consumers.
Imagine a situation where financial institutions and banks form an orchestra and the Fed is the conductor, directing the markets and controlling the money supply.
When central bank “gurus” raise the federal funds rate, many banks tend to raise rates. This may make the debt we take on more expensive (for example, a credit card with an APR of 22% versus a credit card with an APR of 17%), but it may also result in Higher savings yield (For example, 5% APY vs. 2% APY).
When the Fed cuts interest rates (it has done so three times this year), banks tend to cut rates as well. Our debt load is down a little bit (although not by much), and we’re not going to get as high a load. Our savings income.
How inflation and the job market work
Financial experts and market watchers spend a lot of time predicting whether the Federal Reserve will raise or cut interest rates based on the direction of the economy, with particular focus on inflation and labor market.
When inflation is high and the economy is in overdrive, the Fed tries to pump the brakes by curbing borrowing. It does this by setting higher interest rates and reducing the money supply. The Federal Reserve has raised the federal funds rate 11 times since March 2022, helping to slow record-high price growth.
However, there are risks if the Fed significantly lowers inflation. Any significant, rapid decline in economic activity could lead to a sharp rise in unemployment, leading to a recession. You may have heard the term “soft landing,” which refers to the balancing act of controlling inflation and keeping unemployment low.
The economy cannot be too hot or too cold. Like Goldilocks’ porridge, it has to be just right.
As economic activity continues to expand and inflation remains at a certain level, the Fed is likely to keep borrowing rates higher through 2025. That means fewer rate cuts next year, especially if the Trump administration pursues economic policies that reignite inflation.
How a 0.25% interest rate cut affects your wallet
What today’s rate cut could mean Credit card annual interest rate, mortgage interest rate and savings rate.
🏦 Credit card annual interest rate
Lower federal funds rates may cause credit card issuers to lower the price of credit for cardholders, which means you’ll pay less interest on your outstanding balance each month. You won’t feel the impact right away, and each issuer has different rules for changing the annual percentage rate. However, you may notice that your APR adjusts within one or two billing cycles.
“Even after multiple rate cuts this year, credit card APRs remain high. For those trying to pay off credit card debt, don’t wait to see if the Fed cuts rates further in 2025. Interest will only continue to increase in 2025.” At that point, your smartest move is to pay off your credit card balance every month or as soon as possible. “ — Tiffany ConnorsCNET Finance Editor
🏦 Mortgage interest rates
The Fed’s decisions affect overall borrowing costs and financial conditions, which in turn affects the housing market and home loan interest ratealthough this is not a one-to-one relationship. For example, since the Federal Reserve began a series of interest rate hikes in March 2022, Mortgage rates soarpeaking last fall. Although home loan rates fluctuate up and down every day and are affected by a variety of factors, they remain high, keeping homebuyers out of the market.
“The Fed does not directly set mortgage rates, so another 0.25% rate cut this month will not immediately lead to lower mortgage rates. That said, continued rate cuts next year, coupled with weak economic data, still points to a long-term outlook for mortgage rates “The long-term downward trend in interest rates is not going to happen as quickly as anyone hopes.” — Catherine WattCNET financial real estate reporter
🏦 Savings rate
Savings interest rates are variable and move in tandem with the federal funds rate, so your APR may drop with more rate cuts. When the Federal Reserve begins raising interest rates, many banks increase their APRs on traditional and high-yield savings accounts, providing account holders with a greater return on their savings. Please remember that not all banks are created equal and we regularly track Best High-Yield Savings Accounts and certificate of deposit at CNET.
“CD and savings APRs have fallen since the Fed cut rates in September and November, and another rate cut in December means they are likely to fall even further. If you have some extra cash, put it in a term deposit or high-yield Savings accounts now allow you to maximize your income before interest rates drop further.” — Kelly ErnstCNET Finance Editor
What’s next for rate cuts?
Experts expect two possible rate cuts next year, although forecasts are changing given the potential impact of the new administration’s economic policies. While market watchers and economists generally have mixed views on the Fed’s monetary decisions, the pace of rate cuts will depend on the job market, inflationary pressures and other political and financial developments.
Stay tuned for CNET’s Fed Day coverage. Your decision about funding is personal, but we’re here to help and guide you.
