Federal Reserve officials cut interest rates for the first time since the early days of the coronavirus pandemic and signaled the possibility of further cuts.
The Federal Open Market Committee (FOMC) moved more aggressively than expected, slashing its benchmark interest rate by half a percentage point, lowering the key federal funds rate to a new target range of 4.75 percent to 5 percent. Economists had expected the Fed to only raise rates by a more modest quarter of a percentage point, according to CME Group’s FedWatch tool, even as investors ramped up bets on a bigger hike in the weeks leading up to the meeting.
Only one Fed member, Michelle Bowman, opposed the decision, preferring a smaller cut of 0.25 percentage point.
“The U.S. economy is doing well, and our decisions today are intended to keep it that way,” Fed Chairman Jerome Powell said at a news conference after the meeting. He also cautioned Fed watchers not to assume that a big half-point cut might become the new norm. “I don’t think we should look at this and say, ‘Oh, this is the new pace.'”
Powell’s comments come after Fed officials signaled they plan to cut interest rates by another half-percentage point by the end of the year. The Fed is scheduled to meet twice this year, in November and December, according to the latest Economic Outlook Summary. Combined with Powell’s comments, the forecast assumes that the Fed will cut interest rates by a quarter-percentage point at both meetings, rather than a larger half-point cut at either meeting.
In 2025, Fed officials expect to cut rates by another one percentage point.
The S&P 500 ended slightly lower after hitting an all-time high on Wednesday’s trading day.
The interest rate cut is a moment many consumers have been waiting for, even if it means little change in their borrowing situation. Interest rates are now back to 2023 levels. Before that, borrowing costs hadn’t been this high in more than a decade. The Fed’s decision will have ripples through consumers’ wallets. The interest rate cut will lead to lower borrowing costs for auto loans, credit cards and even mortgages in the future. Meanwhile, yields on savings accounts and certificates of deposits (CDs) will gradually decline.
Interest rates are falling
Bankrate experts react to the Federal Reserve’s first interest rate cut since 2020 and all the implications it could have on your personal finances
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Interest rates are historically high as the Fed works furiously to combat inflation in the wake of the pandemic. In just a year and a half, the central bank has raised interest rates 11 times, the fastest pace in 40 years, pushing borrowing costs to a 23-year high of 5.25% to 5.5%.
Still, the move signals a new era for Powell and his team. Policymakers have been overly fixated on high inflation, but now they are turning their attention to a slowing job market. The unemployment rate unexpectedly hit a three-year high of 4.3% in July, and employers added just 89,000 jobs that month.
The unemployment rate has since edged back down, recovering to 4.2% in August, but it is rising at a faster pace than Fed officials expected in June last year. In a major speech at a central bank symposium in Jackson Hole, Wyoming in August, Chairman Powell declared that the time has come for interest rates to adjust to a slowing economy. Fed officials do not want to see the job market slow any further, he added. The Fed’s new forecast also revealed that policymakers now expect the unemployment rate to reach 4.4% by the end of 2024, up from the original 4%.
Unlike during the Great Recession or the coronavirus pandemic, the Fed’s rate cuts this time around are not aimed at stimulating economic growth, which is expected to reach 2.9% in the third quarter of 2024, according to the Atlanta Fed’s GDPNow forecast, with the financial system stable by most other measures.
Rather, the Fed’s latest move is intended to ensure that interest rates don’t get kept too high for too long and unnecessarily slow the financial system. There were fears that the larger-than-expected steps could signal that the Fed is worried about the economy, but Chairman Powell has repeatedly said that he sees no signs that a recession is looming.
The Fed was late to the game when it raised interest rates to tame inflation, but it appears to have learned its lesson: It is insuring itself against being late again by cutting rates a big half-point early on.
— Greg McBride, CFA, Chief Financial Analyst, Bankrate
Fed interest rate decision: What it means for you
Saver
The only silver lining in this era of high interest rates are the historic yields on savings accounts and fixed deposits, and it will be a long time before interest rates fall before that changes.
Bankrate’s picks for the best high-yield savings accounts for September 2024 currently offer an average yield of 5.1%, nearly nine times the national average and 500 times higher than the yields offered by Chase and Bank of America. The highest yields range from 5.3% to 5.01%. Meanwhile, the highest-yielding online bank on the market pays 5.31% annual interest, according to Bankrate data.
All of these yields are higher than the current annual inflation rate of 2.5%, according to the most recent data from the Bureau of Labor Statistics’ Consumer Price Index (CPI). Ultimately, what matters most for savers is putting their cash where it will earn them money, and where it will grow faster than prices.
Technically, the so-called “real” inflation-adjusted earnings of the nation’s high-yield online banks are even higher than they were a year ago, meaning you could be better off now even if interest rates are cut.
And while you’re not missing out on the opportunity to lock in a CD, there’s no point in waiting as interest rates are officially starting to fall. If you already have at least six months’ worth of expenses saved up in an emergency fund and can stand to lock in your funds until maturity, consider adding a guaranteed return to your portfolio.
borrower
Lower interest rates could ease some of the debt burden that has made borrowing costs the highest they’ve been in a decade, but a single rate cut is unlikely to be a complete solution.
Credit card borrowers have had to learn that the hard way: The average annual percentage rate (APR) on credit cards has risen to nearly 21% from 16% during the pandemic, when interest rates were near zero, according to data from Bankrate.
People struggling with high-interest debt should focus on chipping away at it as quickly as possible. Today, the best balance transfer cards on the market offer Americans a 0 percent introductory APR for up to 21 months. If you can pay off your balance before your card issuer reverts to the standard APR, you could pay off your debt faster and save hundreds, or even thousands, of dollars in interest. But don’t forget to calculate the cost of a balance transfer. There’s usually a one-time fee of 3 percent or 5 percent of the total debt you’re transferring.
The falling interest rate environment also highlights the importance of comparing offers from multiple lenders and thinking carefully before making any big purchases.
Sure, it’s not always possible to time the market. You might not be able to wait for interest rates to come down when you need your roof repaired or your car breaks down. But if you’re planning on borrowing in the near future, it might be a good idea to wait if you can, since the Fed is expected to cut interest rates even further in the coming months.
Homeowners and Home Buyers
Last fall, mortgage rates were above 8%, according to data from Bankrate. Currently, rates are hovering around 6.2%, the lowest in two years and falling rapidly as lenders adjust to the reality of low interest rates.
The 6.2% mortgage rate is even lower than the 6.6% that Bankrate was forecasting for the end of the year in its quarterly forecast survey from July.
For homeowners who took out mortgages when interest rates were at their highest, this has opened up the opportunity to refinance, and borrowers are typically advised to start calculating how quickly they could recoup the costs of refinancing if they could get an interest rate that’s at least half a percentage point lower than what they’re currently paying — but also take other factors into account, such as how long they plan to live in the home, McBride says.
Interest rates still have a long way to go before they help would-be homebuyers: More than half (52%) of homeowners say they need mortgage rates below 6% to feel comfortable buying a home this year, according to Bankrate’s Mortgage Rate Sentiments Survey.
High mortgage rates are just one aspect of the housing market’s turmoil. Home prices have hit new highs for four consecutive months, according to data from the Case-Shiller Housing Index. That’s partly due to a lack of supply, but rates may still be too high to ease. Three in 10 current homeowners (30%) say they need mortgage rates to be below 5% to feel comfortable selling their home this year, according to Bankrate’s Mortgage Rate Sentiments Survey.
Investors
Financial markets have generally been performing relatively well through 2024. Interest rate cuts could spur investor optimism. Or a storm could jeopardize their expectations.
Before the Federal Reserve’s September announcement, investors were pricing in as much as 100 basis points of interest rate cuts by the end of the year. If the U.S. central bank ends up not following through on that announcement, it could spook stock markets.
Never mind today’s villains: For Americans investing in financial markets for long-term goals like retirement, the best allies are a diversified portfolio and time, which can last decades and may go through periods of low interest rates, periods of inflation, and so on.
