What Happens When the Fed Finally Cuts Rates?

Inflation has slowed and the labor market has softened enough to satisfy the Federal Reserve. That means the central bank is about to cut interest rates.

On Aug. 23, Fed Chair Jerome Powell said, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

In other words, Americans should prepare to finally catch a break when it comes to borrowing to pay for a home, buy a car or open a new credit card. There are also other implications for the health of the broader economy.

Back in March 2022, the Federal Open Markets Committee (FOMC) began to increase the federal funds rate in response to growing inflation. It hiked rates 11 times before finally pausing. The rates, set at 5.25% to 5.50%, haven’t budged since July 2023.

The first cut will almost certainly happen at the Fed’s upcoming meeting scheduled for Sept. 17-18. The futures market’s CME FedWatch Tool now predicts a 87% likelihood that the FOMC will cut the current target rate by 25 basis points; it predicts a 13% likelihood of a larger cut of 50 basis points.

But even if the Fed trims rates next week as expected, the target will still be a long way from the near-zero rate of early 2020 and immediate effects will be muted. Mortgage rates have already been easing in anticipation of a cut, for example, and most consumer credit and lending products are more dependent on your credit score than on the Fed rate. Still, this is viewed as a significant event and could build expectations for more cuts down the road.

So what happens next? NerdWallet writers teamed up to explain how upcoming Fed rate cuts could impact your personal finances and what you can do to prepare.

Credit cards

Sara Rathner, credit cards writer

Credit card interest rates are variable, meaning they adjust up or down shortly after the Fed changes the federal funds rate. So if the Fed lowers interest rates, credit card debt will cost slightly less.

The operative word here is “slightly.” Credit card debt is expensive no matter what the federal funds rate happens to be. Let’s say you have an average balance of $5,000 on a card charging 25% APR. You’ll spend around $1,250 in interest over the course of a year. If your interest rate was 24% instead, that’s just $50 less in interest for the year. Point being, a rate reduction doesn’t translate to a massive savings in interest when it comes to credit cards.

Still, you can use the upcoming Fed news as a reminder to check in on your debt and make a plan to pay it down as aggressively as you can. If you qualify, a balance transfer credit card could give you a year or more without interest. Lower interest rates might make a personal loan a compelling debt consolidation option.

Mortgages

Kate Wood, home and mortgages writer

Mortgage interest rates have already headed lower ahead of any action by the Fed. In April, the average interest rate on a 30-year, fixed-rate loan was 7.04%. August's average was nearly three-quarters of a percentage point lower, at 6.31%. That 73-basis-point drop is larger than any anticipated rate cut, but rates may push even lower once the central bankers start chopping.

Homeowners with adjustable-rate mortgages or home equity lines of credit (HELOCs) should see savings right away as their interest rates ratchet downward. But lower mortgage interest rates might also be a boon to homeowners with fixed-rate mortgages. Those who bought when rates were higher could finally see a significant benefit from refinancing, while owners who feel tethered by their current low mortgage rates may feel more confident about making a move. Reducing that rate "lock in" effect could put more homes on the market, particularly at the starter-home level.

Prospective home buyers likely feel heartened by the prospect of rate cuts, but a quarter or even half of a percentage point cut from the Federal Reserve shouldn't cause a sudden drop in mortgage rates, especially with a downward trend already in progress. So, don't wait on the Fed: Buy when you're ready, not when interest rates are. While you're preparing to buy — and during your home search — work on your finances. Continue to pay down high-interest debt, try to build your credit score, don't take out new loans and keep making on-time payments. That way, when you're applying for a mortgage, you'll be in a strong position to get a lender's best possible interest rate regardless of where prevailing rates are.

Auto loans

Shannon Bradley, auto loans writer

Auto loan interest rates typically follow the path of the Fed rate, but it can take time to see. When car loan rates do begin to fall, will it be a good time to buy or refinance? Here are some considerations to help you decide.

Your APR on a car loan is determined by many factors, such as your credit history, credit score, loan term and vehicle age. Taking time to improve your credit, or to find a slightly used car rather than a new one, is likely to affect your loan rate more than a slight drop in the Fed rate.

From the car-buying perspective, your interest rate is just one part of your monthly payment, which also includes the amount you borrow to pay for the car. In July, the average transaction price for new cars was $48,401, with an average monthly payment of $753. The average listing price for used cars was $25,415. Car prices have improved compared to a year ago, but they still remain higher than pre-pandemic levels. Even when interest rates drop, you will want to focus on a vehicle’s out-the-door price and whether the resulting monthly payment fits your budget.

If you financed a car at a high interest rate, refinancing could be a way to lower the rate and your monthly payment. In general, lenders recommend reducing your rate by 1% or more, without extending the loan term, to get the most out of refinancing. And you’ll want to make sure your savings outweigh any lender or title transfer fees. Since the Fed’s rate decrease is expected to be 50 basis points or less, waiting to refinance after additional rate cuts could be more beneficial.

When you do move forward with an auto purchase or refinance loan, apply to several lenders to find the lowest rate. Most lenders offer pre-qualification with a soft credit check, which gives you an idea of the rate you might get without affecting your credit score. You can use an auto loan calculator to input pre-qualified rates and terms to see an estimated monthly payment and total loan interest.

Personal loans

Jackie Veling, personal loans writer

Prospective borrowers may see slightly lower rates on personal loans at banks, credit unions and online lenders after the Fed makes a rate cut. However, the rate a borrower gets on a personal loan is still mostly determined by information supplied on their application, such as credit score, credit history and debt-to-income ratio. There are steps borrowers can take to boost their chances of qualifying for a loan with a low rate, including building their credit and paying off small debts.

If you’re considering using a personal loan to consolidate debt, it's probably best not to wait for additional rate cuts, especially if you’re struggling with credit card debt. Credit cards tend to have higher interest rates than personal loans, and consolidating credit card debt will begin the process of getting out of debt while saving money on interest.

If you already have a personal loan, you may consider refinancing. Not every lender offers personal loan refinancing, so make sure to research lenders before formally applying for a new loan.

A smart way to always make sure you get the best rate possible on a personal loan is by pre-qualifying . This allows you to check your potential rate with only a soft credit check and compare loan options between lenders.

Student loans

Eliza Haverstock, student loans writer

A Fed interest rate cut will impact private student loans, but not federal student loans.

Some private student loan interest rates will fall. Whether you can qualify for the lowest rates, though, depends on factors like your credit score and income. If you have an existing fixed-rate private student loan, explore refinancing options to lower your interest rate and the amount you’ll repay in total.

If you have a variable rate private student loan, your rate may fall automatically. Consider locking in that lower rate by refinancing to a fixed-rate loan.

Federal student loan interest rates only change once a year. The government sets rates each spring, ahead of the upcoming school year. The rates apply to all federal loans taken out that school year, and they remain fixed throughout repayment. For example, if you borrow an undergraduate loan for 2024-25 at the current 6.53% interest rate, you will keep that rate until you pay off the loan or refinance.

Think twice before refinancing federal student loans — even if you can get a lower rate. Refinancing will permanently turn your loan from federal to private, and you’ll forfeit access to loan forgiveness programs, generous deferment options and other borrower protections, like payments based on your income.

High-yield savings accounts

Margarette Burnette, consumer savings writer

The 2022 Fed rate increases kicked off a prolonged period of rising savings rates, and today some of the best savings accounts have annual percentage yields, or APYs, above 5%. Once the Fed reduces rates, we will likely see a dip in the highest savings rates, so expect those to top out at about 4% APY (or slightly lower). At the same time, the best savings yields will remain well above the national average rate of about half a percent. This average is low in part because some savings accounts, particularly those offered by large banks, consistently offer a next-to-nothing 0.01% APY.

If you deposit $1,000 in an account that earns a rate of 0.01%, it would earn only 10 cents in interest after one year, according to the NerdWallet savings calculator . Put that same $1,000 in a high-yield account that earns 5% and it would grow by a lot more — the interest earned would be about $51.

Even when rates fall, a high-yield account will still be one of the best and safest places for your savings . Say that an account with a 5% rate decreases its yield and now offers 4%. A $1,000 deposit would earn just under $41 in interest after a year. Not quite as much as the 5% account, but still much better than the low-rate option.

Historically, we’ve seen that savings accounts with the best yields tend to consistently outperform their competitors over time, whether overall rates increase or decrease. So if your money is already in a high-yield account, you will probably continue to earn one of the best rates available. But do monitor your rate and compare it to that of other banks, especially for the next few weeks. If your savings APY falls faster than others, consider shopping around for a better option.

Certificates of deposit (CDs)

Spencer Tierney, consumer banking writer

As with savings accounts, certificates of deposit had higher interest rates in the last few years than for most of the past decade. CD rates at major online banks and credit unions exceeded 5% APY, particularly for one-year CD terms. When the Fed raised its rates from March 2022 to July 2023, banks raised CD yields . But the upcoming Fed rate cut is a sign that CD rates have likely peaked and APYs will gradually drop. August saw bigger CD rate decreases than all previous months in 2024, according to a NerdWallet analysis.

If CDs fit into your short-term savings goals, this is a good time to get them. The longer you wait, the lower rates will likely get.

What a CD can do that a regular savings account can’t do is lock in a fixed rate for a dedicated sum of savings. CDs are time-based accounts with term lengths ranging from about three months to five years. Normally, long-term rates are higher than short-term rates. But that trend flipped in recent years. In 2024, competitive five-year CD rates were closer to 4% APY while the best CDs for one year or shorter surpassed 5% APY.

CDs aren’t for everyone, though, and withdrawing from a CD before it ends generally means paying a penalty that wipes out some or all of the interest you earn. Consider CDs for preserving savings earmarked for a large purchase a few years down the road, such as car or home down payment. Or think of CDs as a way to earn steady interest without market risk, especially for folks using CDs for retirement .

The stock market

Sam Taube, investing writer

Publicly-traded companies borrow a lot of money, and the interest rates set by the Federal Reserve affect the cost of that borrowing. With that in mind, interest rate cuts have the potential to boost the bottom line of many companies, although that may affect some sectors of the market more than others.

Certain types of stocks, such as tech stocks and small-cap stocks, may be especially dependent on borrowing to stay afloat. Consumer discretionary stocks primarily make money from consumer spending — and stand to benefit from the increase in buying power brought by lower rates on credit cards and personal loans.

Bank stocks may benefit from a greater spread between the interest they pay out to depositors and the interest they collect from borrowers, as the rates they pay may decrease faster than the rates they collect. And real estate investment trusts (REITs) are income investments that behave a lot like bonds, which tend to rise in value when interest rates decrease.

So lower interest rates are generally a positive for the stock market — but there’s a catch. The Fed is cutting rates because recent jobs reports and other economic data indicate that the economy is slowing down, and a slowing economy can spook investors. Weak jobs data points toward interest rate cuts, but it can also stir recession fears and provoke stock market sell-offs, as it did back in August.

The broader economy

Elizabeth Renter, senior economist

The goal of raising interest rates (and then keeping them elevated) was to take some of the gusto out of the economy. An economy that runs too hot, with lots of spending and borrowing, is one that leads to faster-than-sustainable price growth. When the Fed begins to cut rates, they’ll be signaling they’re done with tapping the brakes. However, they won’t be punching the gas, either.

As they were throughout their rate-raising campaign, they’ll be carefully watching the economic data to determine the magnitude and speed of these cuts. And assuming the economy experiences no unanticipated shocks, they’ll be cautious. Just as the rate-hiking campaign took time to impact the whole of the economy, changing direction will too.

Over time, the ability of both businesses and consumers to borrow at lower rates will lead to increased economic activity. Employers who have been waiting to expand facilities or hire new workers will eventually see rates that entice them to take those steps. Consumers who have been sidelined by high auto loan or mortgage rates may feel a similar nudge, and make those big-ticket purchases. The goal will be to return rates to a reasonable level, one where the economy can continue to grow at a sustainable — not too fast, not too slow — pace.

The 2024 presidential election

Anna Helhoski, news writer

The Federal Reserve operates independent of the rest of government. That means the president doesn’t tell the Fed what to do and the Fed doesn’t factor politics into its decisions. The central bank’s commitment to making nonpartisan decisions is crucial to its effectiveness.

Therefore, the Fed is not going to make any rate decision intended to steer voters toward either Vice President Kamala Harris or former President Donald Trump . Still, some critics are likely to see a rate cut prior to the presidential election as a political move. The same could be said if the Fed waited until after the election to cut rates. So it goes.

The Fed’s actions do impact the economy — they’re intended to. And how an American feels about the economy could influence their vote. Still, it takes a while for the Fed’s decisions to be felt by consumers, so it’s unlikely that a Fed rate cut in September would influence a voters’ choice one way or another.

It’s possible that an avid consumer of economic policy news could be swayed by the Fed’s decision to cut rates. But it’s still unlikely; as many of those news consumers probably have their minds made up.

Meanwhile, a casual news consumer who is also an undecided voter might learn about the Fed’s decision to cut rates and feel more positive about the economy. Those good vibes could lead them to support the current administration. Or not — undecided voters can be fickle.

Hypothetical scenarios aside, the Fed’s rate cut probably won’t impact this election. But whoever wins would almost certainly enjoy presiding over an economy with lower interest rates for consumer products. Even if it’s unwarranted, the winner is pretty likely to take the credit for any economic improvements while they’re in power.

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NerdWallet writes for NerdWallet. Email: articles@nerdwallet.com.

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