What Fed rate cuts could mean for bank accounts, CDs, loans and credit cards

This is the economic U-turn we have been waiting for. The Federal Reserve is expected to begin lowering interest rates on Wednesday.

It’s a long time coming.

After inflation rose to 9.1% in June 2022, the Fed worked to lower consumer prices with 11 interest rate hikes in the following months. Fees remain unchanged from August 2023.

With inflation at 2.5% in August – remarkably close to the target of 2% – Fed officials indicate that they feel the time has come to reduce interest rates.

Read more: Fed projections for 2024: What experts say about the possibility of a rate cut

How monetary policy works

Money controls one interest rate: the federal funds rate, the short term banks use to borrow from each other. The target rate for the federal funds rate remains 5.25-5.50%.

Interest rate decisions, which are passed around the world, affect every aspect of borrowing costs and savings rates. Interest rate controls are monetary instruments that the Fed uses to:

• Slow down the economy by raising interest rates in order to reduce rising costs (high inflation) as measured by the Consumer Price Index.

• We help stimulate the opposite end of the economy by lowering interest rates to inject money into the financial system.

• Allow past actions to mature while the Fed considers future actions by keeping rates steady.

Here’s how lowering your interest rate can lower your loans and accounts.

Learn more: How inflation affects mortgage rates

Low interest rates affect both checking and savings accounts

Your temporary income depends on the amount in the bank. As interest rates rise, so do deposit rates.

Soon, the money in the bank will start getting less money. Savvy savers will need to hunt for good returns when lenders start easing their interest rates.

Checking accounts

Interest-paying checking accounts offer very limited funds. But you need quick access to cash, and if you manage your cash flow, the bank won’t have much of that cash on hand for long.

Interest-bearing checking accounts paid a national average of 0.07% monthly through August 2023. A year later, that rate had risen to 0.08%. It may be the point at the top of a small hill for checking account interest.

Let’s climb the mountain that pays interest on money.

Savings accounts

Short to medium term money is best kept in a savings account. It’s part of your easy investment strategy. Last year, in August, the average monthly interest rate on a traditional savings account at a brick and mortar bank was 0.43%. Last month it was 0.46%.

High-yield savings accounts pay more – Yahoo Finance sees APYs for high-yield savings accounts ranging from 4.25% to 5.25%. You can see that the shopping charges really pay off. (APY is the result of compounding the interest rate. Compounding periods may vary by bank.)

Money market accounts

A money market account tends to increase your profits from a regular checking account, but you may need to deposit anywhere from $10,000 to $100,000 to earn a profit.

Last August, the country’s average monthly interest rate was 0.62%. A year later, it is 0.64%. Consider putting your second income into a money market account. It’s the money you want nearby, but without checking the nearby account.

To do that, look for a money market account. As the Federal Reserve continues to lower interest rates, high yield market accounts will start paying less. Yahoo Finance sees higher interest rates ranging from 4.45% to 5.25%.

What you should do now: Shopping fees at banks, brick and mortar and online. Save your money for the near term and get the most money you can.

Take Care of Your Money

What Fed policy does for CDs

Low interest rates can also affect CDs.

A 12-month CD was earning a monthly interest rate of 1.76% in August 2023. A year later, the same CD was paying 1.88%. The best CDs are around 5.25% APY. But remember, these rates were in effect before the Fed moved to lower rates. Next month, we will start to see prices drop. Also, your minimum deposit and term will affect your rate.

What you should do now: Use CDs to earn interest on your money over the long term. When interest rates drop, long-term CDs can be your best option, while you can use other readily available solutions for your short-term savings.

What the latest Fed outcome will mean for loans and mortgages

Now to the other side of the asset/liability ledger. This is where low interest rates can work in your favor.

Personal loans

The interest rate on personal loans has risen from 8.73% at the start of the Fed’s rate hike in 2022 to 11.92% in May 2024, according to the latest data available.

Student loans

Most federal loans have a fixed interest rate, so the Fed’s policy does not affect them. Private student loans can have variable rates, and Fed rate hikes can be a factor.

To find out the interest rate on an existing loan, contact your lender or loan officer.

Home loans

If you’ve been looking to buy a home for the past two years, you know the story: Home loan rates have gone up. When Fed rates started, lenders were buying 30-year mortgages at around 4%, according to Freddie Mac.

They rose to about 8% last fall, but at the end of the year, mortgage interest rates for 30-year fixed-rate mortgages began to fall in anticipation of a reduction. of prices and are now close to 6%.

It took nearly 20 years for mortgage rates to drop from 7% in 2001 to an annual rate of less than 3% in 2020. And home buyers may not see interest rates drop. low mortgages again soon. The 50-year average for a 30-year fixed-rate mortgage is still more than 7%.

What you should do now: As the cost of borrowing gradually declines, resist the urge to take on more debt or extend the term of existing loans. Explore upcoming mortgage refinancing opportunities.

How do Fed interest rates affect credit cards?

Credit card interest rates have gone from an average of 16% to 21% during the Federal Reserve’s rate hike cycle. With the potential shift to lower interest rates, we can expect further lower fees on credit card balances.

However, relief will come slowly.

What you should do now: Low interest rates can allow you to reduce credit card debt faster. Prioritize paying off the credit cards you can afford — especially those with the highest interest rates — and consider balance transfers to lower interest rates and interest rates. zero credit card based on your credit score. With good credit, a personal loan for credit card debt consolidation may be another option to consider.