Today’s Rate Cut: How the Fed Affects Your Portfolio

the The Federal Reserve lowered interest rates By 0.25% at the end of today’s policy meeting. However, financing rates are likely to remain high for a while because, according to… Federal Reserve press release“The economic outlook is uncertain.”

Maybe you don’t want to hear about interest rates during the holiday season. But now is exactly the time when many of us are thinking about spending and borrowing money.

The Fed’s interest rate decisions affect your account Credit card debt And whether you can get a car loan or mortgage. Interest rates even affect the amount Annual return rate You earn from your Savings account.

while One interest rate cut While it won’t directly impact your money (and doesn’t shake up the economy right away), the government’s monetary policy and general economic outlook affect your money over the long term.

Here’s a quick introduction to interest rates and what you need to know about today’s Fed decision.

How does the Federal Reserve set interest rates?

Interest is the cost you pay to borrow money, whether it’s through a loan or a credit card. Lower interest rates mean the percentage you owe on your outstanding debt is smaller. Low interest rates can also reduce the amount a financial institution or bank pays you, i.e. what you earn Invest your moneyas is the case with a savings account.

The Federal Reserve meets eight times a year to assess the health of the economy and set monetary policy, primarily through changes in the federal funds rate, the benchmark interest rate that U.S. banks use to lend or borrow money to each other overnight.

Although the Fed does not directly determine the percentage we owe on our loans Credit cards and MortgagesIts policies have a ripple effect on the everyday consumer.

Imagine a situation where financial institutions and banks form an orchestra, and the Fed is the leader, directing the markets and controlling the money supply.

When the central bank “maestro” raises the federal funds rate, many banks tend to increase interest rates. This can make the debt we take on more expensive (for example, a credit card APR of 22% versus a 17% APR), but it can also lead to High savings returns (For example, 5% APY vs. 2% APY).

When the Fed cuts interest rates, as it has done three times this year, banks tend to cut rates as well. Our debts become a little less complex (but not by much), and we won’t reach that level The return on our savings.

How inflation and the labor market play a role

Financial experts and market watchers spend a lot of time predicting whether the Fed will raise or lower interest rates based on the direction of the economy, with a particular focus on Economic inflation And the labor market.

When inflation is high and the economy is in overheat, the Fed tries to rein it in by discouraging borrowing. This is done by setting higher interest rates and reducing the money supply. Since March 2022, the Fed has raised the federal funds rate 11 times, helping to slow record-high price growth.

However, the Fed is taking a risk if it succeeds in lowering inflation significantly. Any large and rapid decline in economic activity could lead to a significant rise in unemployment, leading to a recession. You may hear the phrase “soft landing” referring to the balancing act of keeping inflation under control and unemployment rates low.

The economy can never be too hot or too cold. Like Goldilocks’ porridge, it has to be just right.

As economic activity continues to expand and inflation remains fairly high, the Fed will likely keep borrowing rates high through 2025. This means fewer interest rate cuts next year, especially if the Trump administration implements economic policies that reignite inflation. .

How does a 0.25% interest rate cut affect your portfolio?

Here’s what a rate cut today could mean Credit card annual interest rates, Mortgage rates and Savings rates.

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🏦 Credit card annual interest rates

Lowering the federal funds rate can cause credit card issuers to lower their credit rate for cardholders, meaning you’ll be charged less interest on your outstanding balance each month. You won’t feel the effects right away, and each issuer has different rules about changing APRs. However, you may notice your APR adjusting during one or two billing cycles.

“Credit card APRs have remained high, even after multiple rate cuts this year. For those trying to pay down credit card debt, don’t wait to see if the Fed makes more cuts in 2025. Interest will continue to accrue During that time, your smartest move is to pay off your credit card balance every month or as quickly as possible. — Tiffany ConnorsCNET Money editor

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🏦 Mortgage rates

The Fed’s decisions affect overall borrowing costs and financial conditions, which affects the housing market Home loan ratesalthough it is not a 1-to-1 relationship. For example, since the Fed began its series of interest rate increases in March 2022, Mortgage rates roseIt reached its peak last fall. Although home loan interest rates move up and down every day and are affected by multiple factors, they remain high, which keeps home buyers out of the market.

“The Fed does not set mortgage interest rates directly, so another 0.25% cut this month will not immediately lower mortgage interest rates. However, continuing interest rate cuts into next year, along with Combined with weaker economic data, it still points to a prolonged slowdown.” The downward trend in mortgage rates will not happen as quickly as anyone would like. — Catherine WattCNET Money housing correspondent

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🏦 Savings rates

Savings rates are variable and move in tandem with the federal funds rate, so your APY will likely decline after further interest rate cuts. When the Fed began raising interest rates, many banks increased the APY of traditional and high-yield savings accounts, giving account holders greater returns on their deposits. Just remember that not all banks are created equal, we track regularly The best high-yield savings accounts and Certificates of deposits At CNET.

“Annual interest rates on certificates of deposit and savings have fallen since the Fed cut rates in September and November, and another cut in December means they are likely to fall further. If you have some extra cash, keep it in a CD or account High-yield savings now allow you to maximize your profits before rates drop further.” — Kelly ErnstCNET Money editor

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What’s next for interest rate cuts?

Experts expect the possibility of two interest rate cuts next year, although expectations are changing given the potential impact of the new administration’s economic policies. While market watchers and economists typically have mixed opinions about the Federal Reserve’s monetary decisions, the pace of interest rate cuts will depend on the labor market, inflation pressures, and other political and financial developments.

Stay tuned to CNET for coverage of Fed Day. The decisions you make about your money are personal, but we’re here to help guide you.