The Federal Open Market Committee, or FOMC, decided at its November meeting to cut the federal funds rate rate another quarter of a percentage point — bringing it to a range of 4.25%–4.50%. The Fed’s action follows its move in November to bring rates down a quarter of a percentage point.
Read on to learn how the Fed rate cut could affect your finances.
How could the Fed rate cut affect my finances?
Most rate changes made by the Fed — short for the Federal Reserve and its board members who make up the Federal Open Market Committee — end up affecting consumers. This Fed rate cut could be helpful when it comes to credit cards, mortgages and auto loans — but not so great for savings.
Credit cards: If you have credit cards, you might see your card APRs drop some, though not immediately. This could help you make headway paying down your debt because more of your payment will go toward your principal balance, and less toward interest. A lower rate also generally means interest won’t pile up on outstanding balances quite as fast. Just note that it can take time after a Fed rate cut to see any interest rate decrease kick in on your account.
Learn more about the Fed’s impact on credit cards
Any Fed rate change, whether up or down, typically affects interest rates on credit cards because virtually all cards come with variable (versus fixed) interest rates. For example, according to the Federal Reserve, the average credit card interest rate was 21.19% in August 2023, when the Fed rate was 5.25-5.5%. That was up from an average credit card rate of 20.84% from the second quarter of 2023, when the Fed rate was lower (4.75%-5%).
While Fed rate hikes in 2022 and 2023 likely pushed credit card interest rates higher, they have actually been higher than average for some years now. This is mainly due to Fed rate hikes between 2016 and 2019. By contrast, the average credit card interest rate was less than 13% from May 2011 through May 2017, a period when the average fed funds rate was lower.
When interest rates are on the rise, it’s a good time to try to pay down your credit card debt as aggressively as possible before interest rates increase more. You may also consider taking advantage of your card’s grace period (if you have one) to avoid interest payments. When the Fed cuts rates and your card interest rates dip, you can look at it instead as a boost to your debt-slashing strategy.
Mortgages: The Fed rate drop could keep encouraging mortgage rates downward. If you’re thinking about buying or refinancing, it’s a good time to monitor what lenders are offering — but remember that the Fed is still expected to lower the funds rate more more heading into 2025. Mortgage rates don’t always exactly mirror the Fed’s actions, but decreases in the Fed rate typically mean better offers from lenders.
Learn more about the Fed’s impact on mortgages
Most people with mortgages have a fixed rate, so a fed funds rate change isn’t likely to affect them. People with adjustable-rate mortgages and new borrowers are more likely to be affected. If rates are on the rise and you have an adjustable rate, it might be worth seeing if you could get a lower rate for refinancing. If you’re thinking about buying, you may want to strike before rates go up more.
If, on the other hand, it looks like rates are going down, it may be worth waiting a bit to buy or refinance and monitor the situation for even better deals.
Auto loans: Auto loan rates might be friendlier following a Fed rate cut, and even a small rate decrease could save you money over the life of an auto loan. But like with mortgages, it’s possible we’ll see auto loan rates further improve if the Fed rate drops more in the coming months.
Learn more about the Fed’s impact on auto loans
While a Fed rate change could affect auto loan interest rates, the relationship between the two is complex. A Fed rate hike can cause a rise in auto loan rates, but they can also be high without any Fed interest rate hikes going on.
For example, the average auto loan rate for a 60-month loan rose from 7.81% in the second quarter of 2023 to 7.88% in August 2023, reflecting the Fed rate hikes of May and July. However, during a period when the effective Fed funds rate was low — 0.06% in May 2021 — the average 60-month term auto loan rate was 5.05%.
Savings: The likely downside of a Fed rate cut is that banks typically respond by lowering interest rates on savings accounts, so you’ll earn less on them. A small drop might not make much difference. But with further rate cuts likely, you might want to explore and shop for high-yield savings accounts, CDs or other options to help your savings grow.
Learn more about the Fed’s impact on savings
Federal Reserve data confirms the correlation between Fed rate changes and savings interest rates. For example, from May 2021 to 2022, the average savings account interest rate was 0.06%. The Fed rate hikes that happened over the next year increased the average national savings account interest rate to 0.46% in August 2024. That may not sound like much, but 0.46% is nearly eight times higher than 0.06%, which could make a real difference in what you earn in interest on your savings.
Reasons for the Fed rate cuts
Context for the Fed’s actions this fall go back to March 2020. At that time, the Fed cut interest rates to zero and kept it that way for two years to encourage spending and help the economy through the coronavirus pandemic.
By March 2022, the economy was recovering — triggering inflation (rising prices) — so the Fed raised rates by 25 basis points to a level of 0.25–0.50%. It then kept raising the Fed rate a number of times through July 2023 to get inflation under control.
The Fed rate had remained at a range of 5.25%–5.5% since the last increase on July 27, 2023.
The Fed’s move to reduce interest rates reflects its confidence that inflation is in hand now. According to the Bureau of Labor Statistics, the year-over-year inflation rate from September 2022 to September 2023 was 3.7%. Heading into its September 2024 meeting, the year-over-year inflation rate had improved to 2.9% — closer to the Fed’s target ideal of 2%.
History of Fed rate changes
The Fed adjusts interest rates to help keep the economy stable.
These adjustments affect how much it costs to borrow money or earn interest on savings. When the economy is hot with a lot of spending happening, the Fed may raise the federal funds rate to slow things down. When it’s slow, they may lower rates to make borrowing cheaper and encourage spending. This helps control inflation and keep the job market steady.
Heading into the September 2024 FOMC meeting, the effective fed funds rate of 5.33% — even after many rate hikes in 2022 and 2023 — was actually low compared to historical levels. The notoriously high interest rates of the late 1970s and early 1980s make the current Fed fund rate look like nothing.
For example, during the week of July 8, 1981, the effective Fed funds rate reached 19.93%. The corresponding 30-year fixed rate mortgage rate average was 16.79% — reaching a peak of 18.63% the week of Oct. 9, 1981.
After the fed funds rate peaked in the early 1980s, rates were mainly on a decline. The 2022 and 2023 rate hikes were surprising because they came in quick succession, and the increments of increase were larger than usual. Also, Americans had gotten used to years of near-zero interest rates in the wake of the housing crash and Great Recession.
When is the next Federal Open Market Committee meeting?
The next Fed meeting on interest rates will be held January 28–29.