What it means for your bank accounts, loans, credit cards and investments

There was another quarter-point cut in short-term interest rates Thursday from the Federal Reserve.

With the election over, stocks soaring and prices falling, frothy optimism is bubbling up in the capital markets.

With inflation at 2.4% in September – within fractions of the 2% target – Fed officials decided to cut interest rates by another 0.25%. The challenge remains: the softland economy.

There are many moving parts that need to be coordinated.

Read more: Fed predictions for 2024: What experts say about the possibility of more rate cuts

The Fed controls one interest rate: the Federal Funds rate, the short-term rate banks use to borrow from each other. The target range for the federal funds rate is currently 4.50-4.75%.

Bold interest rate decisions filter through the financial world and affect virtually every facet of borrowing costs and savings rates. Interest rate management is monetary medicine that the Fed uses to:

• Slow down the economy by raising interest rates in an attempt to tame rising costs (high inflation) as measured by the consumer price index.

• Help spark a recovery when we are at the opposite end of an economic cycle by lowering interest rates as an injection of liquidity into the financial system.

• Allow past moves to take root while the Fed considers future actions by keeping interest rates steady.

In a Nov. 7 press conference, Fed Chairman Jerome Powell said that “as the economy develops, monetary policy will adjust to best promote our maximum employment and price stability objectives.”

He reiterated that the FOMC makes its decisions on a meeting-by-meeting basis and can adjust monetary policy as circumstances dictate.

“If the economy remains strong and inflation does not sustainably move toward 2%, we can ease policy restraint more slowly. If the labor market were to weaken unexpectedly or inflation falls faster than expected, we can move more quickly,” Powell said.

Here’s how the Fed’s new interest rate strategy could trickle down to your loans and accounts.

Your short-term liquidity depends on money in the bank. As interest rates rose, so did depository interest rates.

Now cash in the bank will start earning less. Savvy savers will have to hunt for the best returns as providers start to ease their interest payments.

Checking accounts that pay interest provide the lowest returns. But you need quick access to the money, and if you manage your cash flow, the bank won’t have most of that money in its hands for long.

Interest-earning checking accounts paid a national average of 0.07% monthly in October 2023. A year later, that rate was flat at 0.07%. It is already quite a bit lower from the 0.08% interest that was paid in September this year.

Short- to medium-term money is best parked in a savings account. It’s part of your easy-in, easy-out cash strategy. Last year, in October, the average monthly interest rate on a traditional savings account at a brick-and-mortar bank was 0.46%. Last month it was 0.45 per cent.

High-Yield Savings Accounts Pay More – Yahoo Finance sees APYs on high-yield savings accounts ranging from 4.00% to 5.25%. You can see that shopping prices really pay off. (APY is the result of compounding your interest rate. Compounding periods may vary from bank to bank).

A money market account often increases your returns from a joint checking account, but you’ll likely need to deposit anywhere from $10,000 to $100,000 to earn the boost.

Last October, the national average monthly interest rate was 0.65%. A year later, it is 0.61 per cent. Consider putting your second layer of cash into an above-average money market account. This is the money you want to keep close at hand, but not close your checking account.

To do that, look for a high yielding money market account. As the Federal Reserve continues to lower interest rates, high-yield money market accounts will begin paying less. Yahoo Finance sees high yield rates from 4.00% to 5.25%.

What to do now: Store prices in banks, both physical and online. Keep your cash flexible in the short term and earn the best price it can.

This new lower interest rate cycle will also affect CDs.

A 12-month CD earned 1.79% monthly interest in October 2023. A year later, the same period CD paid 1.81%. But these national averages don’t always reflect better rates you can find by shopping around: the best CDs are around 4.50 to 4.85% APY for a six-month period. Your minimum deposit and term will affect your interest rate.

What to do now: Use CDs to earn interest on your money over the medium term. As rates fall, long-term CDs may be your best option while using other readily available solutions for your short-term savings.

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

Interest rates on personal loans have risen from 8.73% at the start of Fed rate hikes in 2022 to 12.33% in August 2024, according to the latest data available. Now that the Fed is cutting interest rates, we can expect to see these rates slowly slide lower.

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

To learn the interest rate on an existing loan, contact your lender or loan provider.

If you’ve been looking to buy a home in the past two years, you know this story: Mortgage rates have been rising. When the Fed rate hikes began, lenders were pricing 30-year fixed-rate mortgages around 4%, according to Freddie Mac.

They rose to nearly 8% last fall, but home loan rates for 30-year fixed mortgages fell below 7% last December. Apart from a bump above 7% in May, mortgage rates have remained in the 6% range.

It took nearly 20 years for mortgage rates to drop from 7% in 2001 to an annual percentage rate below 3% in 2020. And homebuyers may not see lenders pricing mortgage rates that low again anytime soon. The 50-year average for a 30-year fixed-rate mortgage is still well over 7%.

What to do now: As borrowing costs slowly decline, resist the urge to take on more debt or extend the term of existing loans. Monitor upcoming mortgage refinancing opportunities.

Read more: How the Fed rate decision affects mortgage rates

Credit card interest rates have moved from an average of just over 16% to just over 21% over the course of the Federal Reserve’s rate hike cycle. With a shift to lower rates, we can look forward to some lower fees on credit card balances.

However, the relief will come gradually.

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

The Federal Reserve was created after a banking crisis in 1907. Today, it is the glue that binds our diverse financial system together. Every Fed rate move is followed closely by Wall Street and can trigger a quick reaction in the capital markets.

Dig deeper: The stock market crash that brought us the Fed

Inflation and the labor market

The Fed appears to be controlling inflation with interest rate moves aimed at having a minimal impact on the labor market. The adjustment of consumer demand raises or lowers the heat in consumer prices.

Read more: Jobs, Inflation, and the Fed: How They’re All Related

Your 401(k), IRA and taxable investments

How does all this affect your investments? Some people avoid looking at their 401(k) during times of drastic market declines. Others are obsessed with daily balances.

Something in between the two extremes is probably best: Regular maintenance with professional guidance as needed.

As the Fed lowers interest rates, companies have greater access to cheaper capital. It encourages expansion, hiring and often: stock performance. However, stocks in banks and the financial sector may fall under profit pressure as their margins tighten.

That’s why a proper mix of investments — called asset allocation — helps moderate the risk you take.

Read more: When the Fed cuts interest rates, how does it affect stocks?