Key takeaways

1. The Fed recently cut its key rate by half a percentage point, bringing it to a range of 4.75% to 5%.

2. Borrowing costs, including mortgages, credit cards, and loans, may begin to stabilize or decrease slightly, providing some relief after a period of rising rates.

3. CDs continue to offer attractive returns despite the rate cut, making it a good time to secure higher interest on deposits.

In a historic decision, the world’s most powerful central bank: the Federal Reserve announced a reduction in interest rate by (50 bps) half a percentage point to 4.75 per cent—5 per cent. The cut, which took place for the first time in four years, comes after 11 rate hikes since March 2022.

The central bank said the considerable reduction will help fight inflation and maintain stable prices. The cut is expected to impact the affordability and employment status of citizens. It will also help ease the cost of borrowing and influence consumers’ decisions about everything, from expenses to savings.  

“The messaging from the Fed is inflation has slowed, and because of that we don’t need rates at such high levels,” Veronica Clark, an economist at Citi, told CBS News. “That will impact affordability for things like new homes, new cars or credit cards, and so the consumer will eventually feel the impact of lower rates.”

Here are 5 Ways It Could Impact You

1. Savings

As the Fed lowers its benchmark rate, it will eventually impact your returns.

“Lower interest rates make it harder to maximize savings and preserve the capital built while interest rates have been higher,” said Matt Brannon, a personal finance expert at MarketWatch guides. He says it is best to move your savings to a high-yielding savings account. 

If you do not need cash urgently, you can consider certificates of deposit (CDs). CDs tend to be popular when interest rates are high, and as anticipated by many economists, CD rates have already begun to decline following the Fed’s interest rate cut.

Locking in a good CD rate is a smart option for those considering high-yield savings accounts, whose rates fluctuate with the market and are expected to decline soon as well. 

2. Borrowing Costs

After more than a year of rising interest rates, which made borrowing more expensive, this rate cut may signal some relief for consumers looking for loans. While rates are still historically high, the recent reduction could slow the pace of these increases and eventually lead to lower borrowing costs.

Considering that the Fed’s key rate is linked to other popular borrowing benchmarks such as prime and Secured Overnight Financing Rate, or SOFR, the borrowing rate consumers pay is likely to improve. Those with debt can benefit from this. 

Greg McBride, an analyst at Bankrate said the slashing of Fed’s rate will lead to lower auto loan rates, especially for borrowers with strong credit profiles. Those with lower credit profiles can expert a double rate for the remaining year as lenders will try to keep rates high to cover upcoming losses. However, if your loan has a fixed interest rate, you won’t feel the impact. 

An important point is to note that banks are not obligated to align their interest rates with the Fed’s rate. Each bank will respond in its own way. 

3. Stock Market & Investments

Lower borrowing costs can encourage investment, as investors seek better returns amid weaker yields from bonds and fixed income. Rate cuts will also reassure those worried about economic slowdowns.

Declining stock prices can present valuable buying opportunities for those looking to strengthen their long-term portfolios.

However, before rushing into anything, it is crucial to maintain a long-term view, resist knee-jerk reactions, and continue regular retirement contributions. 

4. Job Situation 

Lower rates are typically seen as a way to stimulate economic growth. By making it cheaper to borrow, the Fed is encouraging businesses to invest, expand, and hire more workers. This could help support job creation and boost consumer spending in the coming months. 

A stronger economy could be a positive sign for workers, with more job opportunities and potentially higher wages. However, the effects may take time to materialize. 

5. Mortgages

If you’re looking to buy a home or refinance your mortgage, you might see rates stabilize or even dip slightly. This could offer a small window of opportunity for potential homeowners who have been priced out by previous rate hikes.

Federal Reserve Chair Jerome Powell highlighted that the decline in mortgage rates could help revive the housing market, which has been stagnant as many homeowners secured low rates during the pandemic, refinancing into 30-year fixed mortgages at around 3% — less than half of current rates.