What a Fed rate cut means for your finances

How to make smart financial decisions in a low interest rate environment.*

Wondering how a lower Fed rate impacts you? It’s a good question. 

Since its inception, the Federal Reserve, a.k.a. the Fed, has worked to steer the U.S. economy toward strong employment and stable prices. To reach those goals, the Fed uses one of its most powerful tools: interest rates. By raising the federal funds rate or lowering it, the Fed tries to influence the cost of borrowing money, which can curb or boost inflation. 

Alright, this may all seem pretty high-level. It’s just a bunch of news for policymakers, economists, and investors playing the market. Right? Not so fast. While it may sound like a fancy finance term, the federal funds rate is the interest rate banks charge each other to lend funds overnight. When that rate goes down (or up), the effects trickle down to you and the financial products you use every day—think credit cards, loans, and savings accounts.

What happens when the Fed cuts interest rates? You could see the effects trickle down to the financial products you use every day.

Even if you don’t typically follow financial headlines, understanding what happens when the Fed cuts interest rates can help you make smart financial decisions when it comes to borrowing, saving, and spending. If you’re wondering, “What does a Fed rate cut mean for my finances?” the experts have answers. 

What goes up and what comes down with a Fed rate cut

What happens when the Fed cuts interest rates? One of the Fed’s goals with a rate cut is to make borrowing less costly. Translation: You could see lower interest rates on credit.

John Norris, an economist and host of a podcast on the economy and investment strategy, says that a Fed rate cut could actually be helpful to the average consumer. “If history serves as a guide, the prime rate will fall by the same amount as the Fed’s actions,” Norris says. “This means credit cards and home equity lines of credit (HELOCs) will be a little cheaper for consumers moving forward.” The prime rate, which is based on the federal funds rate, is the interest rate lenders charge their most creditworthy customers.

You might feel how a lower Fed rate impacts you if the prime rate also falls, making it cheaper to borrow money for big purchases.

Broken down simply, here’s how a lower Fed rate impacts you and the various types of credit you may already have or be considering:

  • Credit cards: “Credit cards are almost exclusively variable APR,” says Greg Mahnken, who used to work as an analyst for a consumer finance education company. “This means that as the prime rate goes up and down, the interest rate of the card will fluctuate as well. Your card issuer must tell you the margin rate—that’s the margin added to the prime rate to get your credit card’s APR,” Mahnken explains. If you’re wondering how a lower Fed rate impacts you and your cards, you could be charged less to carry a balance and may see smaller minimum payments.
  • Mortgages: What happens when the Fed cuts interest rates? For mortgages, it depends on the type of loan. The rate could drop on adjustable-rate mortgages, for example, meaning a reduced monthly payment. When it comes to how a lower Fed rate impacts you with a fixed-rate mortgage, the answer could be different. This type of mortgage may not be as directly impacted by a Fed rate cut and is influenced by other factors.
  • Home equity lines of credit: If you have a HELOC or are in the market for one as you look to save money on home repairs, you could see a rate decrease following a Fed rate cut, lowering monthly payments.
  • Other loans: If you’re wondering how a lower Fed rate impacts you, know that it could influence lower rates on auto loans for car owners, but factors including industry sales and financing offers also come into play. If you have a private student loan and a regular payment schedule, you could see a lower monthly payment.

Now, what does a Fed rate cut mean for my finances when it comes to saving? Savers could see interest rates decline on deposit accounts like savings accounts, money market accounts, and certificates of deposit (CDs). A lower interest rate here means you’ll earn less in interest on your savings balances.

“Banks make money by making a spread between what they pay for deposits and what they charge on loans,” Norris says. “When what they can charge on a loan goes down, it makes sense what they pay on deposits will eventually do so as well.”

“If history serves as a guide, the prime rate will fall by the same amount as the Fed’s actions. This means credit cards and home equity lines of credit (HELOCs) will be a little cheaper for consumers moving forward.”

John Norris, economist and podcast host

How to manage a Fed rate cut as a borrower, saver, and spender

Even if you can answer, “What does a Fed rate cut mean for my finances?” that’s only half of the puzzle. The other half is determining how to manage your finances in a lower rate environment so you can achieve your financial goals. Follow these tips when you consider how a lower Fed rate impacts you for borrowing, saving, and spending:

If you’re borrowing:

  • Look for lower rates on new credit cards: “Credit card users should always be on the lookout for lower variable rate formulas, and a rate cut or two is a perfect time to do a little homework when looking for new cards,” Norris says.

What happens when the Fed cuts interest rates? You may see lower rates on credit cards and certain types of loans.

  • Ask for lower rates on existing credit cards: When you’re learning what happens when the Fed cuts interest ratesconsider that negotiating better rates on borrowed money could be easier in a lower interest rate environment. For example, you can check with your credit card issuers to see if you can get a lower interest rate on the credit cards you have already.
  • Refinance high-interest debt: “If your issuer/lender won’t lower your interest rate despite a cut to the Fed/prime rate, look into refinancing or consolidating your debt with a lower-interest loan,” Mahnken says.

If you’re saving:

  • Find a competitive savings account rate: Even though lower rates on savings is often what happens when the Fed cuts interest rates, banks could still offer competitive savings rates. For instance, online banks can often pass savings on in the form of higher interest rates on their deposit accounts because they save money by not maintaining brick-and-mortar locations. Discover, for instance, offers a high-yield savings account with an interest rate over 5x the national savings average.1 So while rates may go down on average, you can possibly earn a higher interest rate on your savings than you had in the past with a high-yield account.
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  • Lock in a higher fixed rate: If you anticipate more Fed rate cuts in the future, then explore savings vehicles with a rate that you can lock in. With a fixed-rate certificate of deposit, for example, the CD interest rates are fixed for the entire term. If you open a 5-year CD, your savings will continue to earn the same interest rate despite rate cuts. Note that CDs often come with an early withdrawal penalty if you withdraw your funds before the end of the account’s term, so they’re best used for savings you won’t need to touch for a set period of time.

If you’re spending:

  • Decide to buy, but do it wisely: Since one answer to “What does a Fed rate cut mean for my finances?” is that borrowing costs less, it could make sense to go ahead with that large purchase you’ve been planning for ages. “When it comes to spending, lower interest rates can encourage bigger purchases, such as home improvements, cars and homes,” Mahnken says. “But before making a big-ticket purchase, make sure you have a budget so you can see how the purchase will affect your monthly cash flow.”
  • Pursue a passion that requires capital: If you can get access to borrowed money at lower rates, some of your personal goals that require credit could be more achievable. Maybe you’ve been preparing to start a business endeavor or pursue higher education to boost your earning potential. Now could be the time to set things in motion.

“When it comes to spending, lower interest rates can encourage bigger purchases, such as home improvements, cars, and homes. But before making a big-ticket purchase, make sure you have a budget so you can see how the purchase will affect your monthly cash flow.”

Greg Mahnken, former analyst at a consumer finance education website

Fed rate cut or not, there’s always room for financial improvement

Even if financial news isn’t your thing, paying attention to trends like a Fed rate cut (or hike) can help you manage your money most effectively. Despite the interest rate climate, though, it’s still important to remain disciplined in your financial strategy. To do this, you can set financial goals, create a simple budget to reach them, and educate yourself on tools and methods that can help you in the process. Whether interest rates are low or high, you’ll always win with this approach.

Want to learn about how Fed rate cuts make an impact on your savings? Learn how a Fed rate cut could impact your savings account

* This should not be considered tax or investment advice. Please consult a financial or tax advisor if you have questions.

1 The APY for the Online Savings Account as of 12/01/2022 is more than five times the national average APY for interest bearing savings accounts with a balance of $500 as reported by Curinos as of 12/01/2022. National average is based on information regarding the top 50 banks (by deposit size) and may not include information from variations in regional pricing at such banks or information from products that may not be widely available to their customers. Rates were obtained from Curinos, who relies on the data from the banks it tracks and such information cannot be guaranteed. APYs are subject to change at any time.

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