It was the announcement consumers and economists alike had been waiting for. On Sept. 18, the Federal Reserve made the decision to lower its benchmark interest rate by half a percentage point, marking its first cut in 2024, following a series of rate hikes in 2022 and 2023.
The Fed raised interest rates during that two-year period because it needed to slow the pace of inflation down. Consumers’ budgets were buckling under the weight of higher grocery costs, gas prices, and utility bills. And even though many Americans had stimulus funds to tap in 2022, as the year wore on, a lot of that money got eaten up by sky-high costs. So the Fed basically had no choice but to intervene.
But now that inflation has been cooling, the Fed doesn’t need to keep its benchmark interest rate so elevated — hence its recent decision. And you should know that September’s rate hike is likely only the first of many on the part of the Fed. That has the potential to impact your finances for better and for worse.
The Fed needs to reverse course
The Fed puts a lot of thought into its interest rate policies. The central bank’s goal is to achieve a target of 2% inflation over the long run. It’s this level, the Fed feels, that’s most likely to lead to economic stability over time.
In August, annual inflation was measured at 2.5% according to that month’s Consumer Price Index, which measures changes in the cost of consumer goods and services. Since 2.5% isn’t so far off from the Fed’s 2% target, the central bank opted for a larger rate cut in September than a smaller one.
The Fed could’ve lowered its benchmark interest rate by a quarter of a percentage point. But it went with half a point for more impact.
However, since the Fed raised the federal funds rate 11 times, it will no doubt seek to cut that rate numerous times to get back to where it was before those hikes took place. For this reason, consumers should expect a series of cuts that extend well into 2025.
What the Fed’s rate cuts mean for you
It can be argued that the Fed’s rate cuts are both positive and negative for consumers. On the plus side, as interest rates fall, borrowing should get less expensive.
Come 2025, you may find that it’s cheaper to sign a mortgage or put an auto or personal loan in place. You may also find that your credit card balance costs you less in interest.
On the other hand, lower interest rates are bad for savers. You may notice that your savings account APY starts falling consistently as the Fed moves forward with rate cuts. And you can kiss the 5% CD rates savers have been enjoying goodbye.
Either way, it’s important to pay attention to the moves the Fed makes, because they could impact your wallet. And you should also decide what moves you should make in light of the Fed’s expected actions.
If you have money in the bank right now, for example, you may want to move some out of a savings account and into a CD so you can lock in a great APY before rates continue falling.
Or, you may decide to gear up to buy a car in 2025 given that auto loans are expected to get cheaper. And if that’s on your radar, you may want to leave more money in savings rather than tie it up in a CD.
All told, the Fed’s September rate cut is likely to be the first of many. Keep tabs on future rate cuts so you can act accordingly.
