For the first time since early 2020, the Federal Reserve slashed rates at its September meeting. Now, the central bank’s benchmark interest rate sits a half point lower, at between 4.75% and 5%. Previously, rates had remained at a high of between 5.25% and 5.50% since July 2023.
This rate cut “is one of the most heavily anticipated of the year,” said The Washington Post. After holding off for a long time as it monitored inflation and other economic indicators, the Fed’s “more aggressive approach” suggests “officials are proactively trying to ease pressure off the economy and keep the job market from slowing any further.”
What will the Fed do next?
The rate cut the Federal Reserve announced at its meeting in September could be the first in a series of rate cuts to come. In the Summary of Economic Projections, also known as the dot plot, released after the September meeting, Fed officials “projected another half point of rate cuts later this year, which would lower the central bank’s policy rate to 4.4%,” said The New York Times. “And by the end of 2025, they expect rates to be down to 3.4%.”
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Federal Reserve Chair Jerome Powell spoke about the Fed’s move toward rate cuts, and its start with a more aggressive cut than some expected, in a press conference following the meeting. “Our patient approach over the past year has paid dividends,” he said, per The New York Times, but now “the upside risks to inflation have diminished, and the downside risks to unemployment have increased.”
While previously, the Fed “has struggled to get inflation down to 2%,” now it “expects the long-run neutral rate to be around 2.9%,” said CNBC. Still, Powell maintained after September’s meeting that the U.S. economy was in good shape. “It’s growing at a solid pace, inflation is coming down, the labor market is in a strong place. We want to keep it there,” he said, per NBC News.
When is the next interest rate decision?
The next Federal Reserve meeting is scheduled for Nov. 6-7, shortly after the U.S. presidential election. It has just one more meeting this year after that, in December. Fed officials have predicted a further lowering of the benchmark rate before the end of 2024.
How do interest rates affect the economy?
The Fed uses interest rates “like a gas pedal and a brake pedal,” Forbes said. Lowering rates stimulates the economy; raising rates slows the economy down. The agency doesn’t actually set the funds rate — banks do that — but “the Fed assumes that banks will use it as a floor in their own lending,” Forbes added.
Rate changes usually take “at least 12 months” to have “widespread economic impact,” Investopedia said. But the stock market reacts immediately. For example, when Powell signaled last year that further interest rate hikes were likely, the market went into a bit of a tailspin. The major indexes each fell more than 1%. Beyond stocks selling off, “Treasury yields rose and the dollar extended again after Powell’s comments,” said Reuters.
What do rate cuts mean for your wallet?
Now that the Federal Reserve has finally started on what is expected to be a series of rate cuts, a new question emerges for consumers: What do they mean for your finances?
For the most part, it is good news. It is expected that these long-awaited interest rate cuts “will provide some welcome relief for consumers who are in the market for a home or auto purchase, as well as for those carrying pricey credit card debt,” said CBS News.
However, these effects may not be apparent immediately. For mortgage borrowers, for instance, “there may be a delay, in part because many lenders have already priced in a Fed cut in the near term,” said The Washington Post.
Meanwhile, “other rates, for personal loans, credit cards, and auto loans, are typically more closely tied to actual changes in the Fed’s policy rate and should drop soon after the Fed acts,” said Reuters, citing Parthenon’s Gregory Daco.
It is not all good news. Rate cuts “could also have a downside of shaving the relatively high returns recently enjoyed by savers,” said CBS News. In fact, “some experts have predicted that the top savings accounts could see rates drop by as much as 0.75 percentage points after the Fed cuts rates.”
