The Federal Reserve is expected to decrease interest rates for the first time since 2020 in September, setting off a chain reaction that will indirectly influence several parts of the U.S. economy — including your wallet.
In recent years, the Fed ratcheted up interest rates (and then held them steady) in order to curb excessive post-pandemic inflation. With price increases normalized, they’re bringing rates back down to Earth. Though experts say it’ll likely take a while for everyday Americans to feel the full effects of the Fed’s decision, the central bank’s rate cuts will have far-reaching consequences, especially if they continue as expected throughout the rest of 2024 (and maybe into 2025).
By slashing rates, the Fed will make borrowing money less expensive, broadly making loans cheaper and saving less desirable. Here’s how lower interest rates could impact…
Savers
While high interest rates have been a pain in many areas of people’s finances, they’ve been a boon for savers. That’s because when benchmark interest rates are high, so are the annual percentage yields (APYs) on deposit accounts like money market accounts, high-yield savings accounts and certificates of deposit (CDs).
With money market and high-yield savings accounts, banks can change the APY whenever they want on the money that’s already deposited in the account. The rates on these accounts are typically quickest to change when the Fed makes adjustments and are effective immediately.
On the other hand, you can lock in your rate with CDs, earning fixed interest on your deposit for a term usually between three months and five years. Lawrence Sprung, founder and wealth advisor at Mitlin Financial, previously told Money that CD rates tend to change seven to 10 days after the Fed changes rates, giving you a small window of time between now and roughly the end of September to lock in your rate.
Keep in mind, though, that if you need to access that money before the full term of the CD is complete, doing so can be onerous, and you’ll likely have to pay a penalty on the interest that has accrued.
Homeowners
According to Freddie Mac’s economic outlook, the average interest rate on outstanding (existing) mortgages is 4.1%. Meanwhile, someone considering refinancing their current loan is looking at a mortgage rate above 6%. The rate discrepancy has left many homeowners feeling trapped: It doesn’t make financial sense to sell their current home and buy a new one at a higher rate unless some kind of life event forces the issue (think: a new job or a divorce). Alas, with the Federal Reserve expected to cut rates by 0.25 percentage points, the effect on mortgage rates may not be enough to move the needle significantly on home sales.
Persistently high rates have also impacted a homeowner’s ability to refinance their homes. Freddie Mac reports that the level of refinancing activity during the first half of this year is at the lowest level since 1995, as rate and term refis simply aren’t attractive to most mortgage holders. However, the upcoming rate cut does mean that more people who purchased property at higher rates within the past year and a half could soon benefit from lower rates.
There is a bright side for homeowners, though. Thanks to the buying frenzy that took place during the pandemic, home prices have increased significantly. Homeowners are now sitting on record amounts of home equity — and lower borrowing costs will make tapping into that equity via a cash-out refinance, home equity loan or line of credit more affordable.
Homebuyers
The pandemic provided a once-in-a-lifetime opportunity for buyers. Record-low mortgage rates meant homeowners could trade up to bigger and more expensive homes, while first-time buyers suddenly found themselves able to afford home sooners than planned. But in 2022, mortgage rates started to rise, and they continue to stay well above the rates seen during the COVID-19 crisis. The result has been a buyer pullback as the combination of record-high home prices and elevated mortgage rates made home purchases less affordable.
While many expect a Fed rate cut to lure buyers back to the market, the comeback may not be as immediate as everyone hopes. Rates have trended lower over the past four months as the expectation of a cut increased and are currently almost a full percentage point lower than the 2024 high of 7.22% seen in May. However, home sales have remained sluggish despite lower borrowing costs.
Although a rate cut by the central bank will help keep mortgage rates moving lower, buyers are more likely to see a gradual improvement than an immediate one.
Investors
For those whose investment horizons permit for market volatility, it’s once again time to consider higher-risk assets like stocks and ETFs. From March 2022 to July 2023, the Fed’s rate-hiking policy made low-risk assets — like bonds, Treasury bills, CDs and other cash alternatives — nearly as appealing as the equities market. But when the central bank enacts its first cut to the effective federal funds rate, safe-haven assets and high-yield savings products where investors have been stashing cash will begin to lose their appeal.
In August, Wells Fargo’s head of global investment strategy, Paul Christopher, told CNBC that when the Fed begins cutting rates, the market could be looking at a watershed moment, the likes of which haven’t been seen since 1995. That year, when Alan Greenspan’s Fed slashed rates, the S&P 500 gained over 34% after posting a record 77 all-time highs. Investors who overlook this opportunity and fail to deploy their cash positions could find themselves on the sidelines as the stock market potentially posts a historic finish to an already strong year.
Retirees
Time is running out for retirees (and those approaching retirement) to lock in the best APYs available for fixed-income instruments since the eve of the Great Recession. But there’s still time to lock in higher rates on these low-risk investments before their APYs fall. The one-month Treasury bill, for example, is currently yielding 5.15%, which is the APY being offered by Connexus Credit Union for its 10-month share certificate. For retirees looking to lock in rates for a longer term, six-month Treasury bills are yielding 4.76% while two-year Treasury notes are offering 3.75%.
A comfortable retirement often means successfully managing your fixed income, and acting on higher rates now can provide security farther down the road.
Drivers
Auto loan rates, like mortgage rates, are heavily dependent on the federal funds rate. With auto loan rates averaging 9.7% for new vehicles and 13.9% for used vehicles, car buyers have been committing to record-high monthly payments, while other shoppers have delayed purchases.
Rates should finally come back down when the Federal Reserve enacts cuts: “Once the fed funds rate is headed for neutral, the average rate on new auto loans is likely to end up between 7.5% and 8%,” Cox Automotive wrote in a recent report.
Officials including Powell have argued that high interest rates helped halt runaway inflation in car prices. As auto loan rates more than doubled due to rate hikes, the demand for new vehicles cooled and prices for new vehicles flattened out while used car prices actually fell significantly. If more car buyers start shopping again when interest rates come down, it wouldn’t be surprising to see car prices resume their normal rate of growth.
More from Money:
4 Smart Ways to Get Ready for the Upcoming Fed Rate Cuts
Economists Are Worried the Fed Has Waited Too Long to Lower Rates
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