The Federal Reserve announced a 50 basis point cut to its benchmark interest rate on Wednesday. This marks the first reduction in borrowing costs since the pandemic began in March 2020, as a part of the central bank’s response to easing inflation pressures. Prior to this latest cut, the Fed had been on a consistent streak of 11 consecutive rate hikes, which peaked at a year-over-year rate of 9.1% in June 2022.
The federal funds rate now stands in a range of 4.75% to 5%, providing a break on credit card and personal loan rates across the board. While the federal funds rate is designed to set what banks charge each other, it trickles down to everything from mortgages to student loans. If you’re planning on applying for a credit card, a home, or a car loan any time soon, here’s how the latest interest rate cut will impact your life.
What the fed’s rate cut means right now
While a rate cut of half a percentage point (aka 50 basis points) will certainly reduce borrowing costs, it’s not going to provide drastic relief. Unfortunately, you shouldn’t expect more than a few bucks off most loan payments each month.
Credit cards
So, credit card holders can expect to see a decrease in their annual percentage rates (APRs) within one to two billing cycles. However, for a balance of $5,000, at a rate slightly down from the current 20.78%, it will amount to a few bucks off monthly interest payments. Outside of this news, perhaps the easiest way to lower your credit card’s interest rate? Just ask.
Loan rates
Auto, student, and many private loans are often fixed. Still, a rate cut means they’re likely to become more affordable almost immediately. Existing variable-rate personal loans may also see a decrease in interest rates. Similarly, car buyers could anticipate more favorable auto loan terms in the coming weeks, as lenders adjust their rates in response to the Fed’s decision.
Savings accounts
Unfortunately for savers, the interest earned on savings accounts and certificates of deposit (CDs) may decrease, potentially within days or weeks of the Fed’s announcement. If you’re interested in making the most of multiple savings accounts, Nerdwallet has a good selection of online banks you could choose from here.
What the rate cut means long-term
While some effects of the rate cut will be almost immediate, others will take time to materialize.
Mortgages
While the Fed doesn’t directly set mortgage rates, its decisions influence them. Mortgage rates are expected to trend downward in the coming months, but the adjustment may be gradual. For instance, fixed-rate mortgages are more closely tied to the 10-year Treasury yield and may take several weeks or months to fully reflect the rate cut. For adjustable-rate mortgages (ARMs), homeowners could see lower rates at their next reset date, which varies depending on the loan terms. In the same vein, HELOC rates, which are typically variable, should decrease within one to two billing cycles, making borrowing against home equity more affordable.
Student loans
Federal student loan rates are set annually based on the 10-year Treasury yield and won’t be immediately affected. However, like with personal loans described above, private student loan rates may decrease for new borrowers and those with variable-rate loans.
Broader economic impact
In theory, lower interest rates encourage consumers and businesses to borrow and spend more, potentially stimulating economic growth. Lower interest rates often lead investors to seek higher returns in riskier assets, potentially boosting stock markets. Plus, as mortgage rates decline, the housing market may see increased activity, with more people able to afford homes or refinance existing mortgages.
It’s important to note that while the Fed’s rate cut provides a general direction for interest rates, individual lenders ultimately determine their own rates based on various factors, including credit scores, loan terms, and market conditions.
As the effects of this rate cut unfold, make sure you stay informed and consider how these changes might impact their financial decisions—from refinancing existing debts to timing major purchases or investments.