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The Federal Reserve shook things up this week by cutting its federal funds rate by a half point for the first time since March 2020. This change isn’t just dry economics news — it has a real impact on your savings accounts, investments, mortgage payments and more. For example, lower Fed rates may reduce the amount of interest you earn on your savings, but they also lower the borrowing costs for new mortgages, credit cards and personal loans.
Let’s unpack how the Fed’s rate cut could shape your personal finances, focusing on five everyday financial products you might already have built into your savings strategy:
1. High-yield savings accounts (HYSAs)
Banks usually react to Fed rate changes by adjusting variable interest rates on high-yield savings accounts fairly quickly. When the Federal Reserve raises its rate, HYSAs often follow suit with increased annual percentage yields (APYs). When the Federal Reserve lowers its rate, APYs on HYSAs typically fall.
Are HYSAs still worth it after a Fed rate cut?
Although rates for HYSAs will likely come down following a Fed rate cut, these accounts will remain an attractive savings option. The best high-yield savings accounts offer considerably higher interest than traditional savings accounts — up to 10 times higher than the 0.46% national savings average.
For example, here’s how an HYSA like SoFi Savings earning up to 4.50% APY with direct deposits compares to Chase Savings offering a low 0.01% APY.
How do traditional savings accounts react to Fed decisions?
While HYSAs often respond quickly to Fed rate changes, you might see little to no effect on money that you keep in a traditional savings account.
For instance, the APY for Chase’s basic savings account stayed at 0.01% even after the Federal Reserve increased its benchmark rate 11 times between March 2022 and July 2023. That’s why it’s smart to park the bulk of your savings in an HYSA. Just make sure it also offers easy access to your money without charging monthly maintenance or other fees.
Dig deeper: How to find and open a high-yield savings account
$0 monthly maintenance fee
Earn up to 4.50% APY with direct deposits
2. Certificates of deposit (CDs)
Certificate of deposit (CD) rates usually follow the Fed’s lead, but with an important twist. APY rates for new CDs normally adjust soon after Fed rate changes. However, CDs come with fixed rates, which means existing CDs are more like a time capsule for interest rates, remaining unchanged until your CD’s term expires or matures. That’s why locking in CD rates is one of the best ways to prepare for upcoming Fed rate cuts.
How do banks adjust interest rates on existing CDs?
Unlike high-yield savings accounts, banks keep rates for existing CDs unchanged even when the Federal Reserve adjusts its Fed rate. For example, if you opened a two-year CD at 4.50% APY in January 2024, it would continue to earn that rate until January 2026, regardless of how many times the Federal Reserve changes rates within your term.
However, this all changes once your CD reaches maturity, when you have two main options:
You can cash out your CD. This means withdrawing your money once it matures, moving it to a linked savings or checking account.
You can automatically renew your CD. This means carrying over your CD funds to a new CD with the same term. Though you won’t always get the same rate as your previous CD — instead, your bank will assign the market’s current APY to your new CD.
Dig deeper: Here’s why you need to invest in a CD today, from a finance expert
What happens if you withdraw money from a CD before it matures?
Most banks charge an early withdrawal penalty if you take your money out of a CD before it matures. This fee is typically a portion of the interest you earned — for instance, 90 days’ worth of interest on a 12-month CD. Unlike a savings account, withdrawing money from your CD CD means “breaking it,” or closing it and cashing out its entire balance.
Banks often tie early withdrawal penalties to CD terms:
Keep in mind that some banks may dip into your original CD deposit if you haven’t earned enough interest to cover the penalty. That said, no-penalty CDs won’t charge a fee for early withdrawal, allowing you to cash out before maturity without worrying about associated costs.
Dig deeper: When is it worth it to break a CD?
3. Fixed and adjustable mortgage rates
Mortgage rates tend to follow the Fed funds rate’s direction, though not in perfect sync. Unlike deposit accounts, mortgage rates aren’t as closely tied to the Fed rate, though they’re influenced by the same economic factors that go into the Fed’s decisions.
When the Fed cuts mortgage rates, you’re likely to see mortgage rates fall, but not always by the same amount. These changes to mortgage rates shape your monthly payments. As an example, here’s how much you can save with a 1% or 2% lower mortgage rate:
Dig deeper: Why a 1% mortgage rate change matters more than you think
How soon do mortgage rates change after a Fed decision?
Mortgage rate movements aren’t as predictable as HYSA or CD rate changes. That’s because mortgages are affected by factors beyond those that influence the Fed rate, including supply and demand, inflation, economic outlook and more.
To see a real-life example, let’s look at how mortgage rates moved when the Federal Reserve increased its benchmark in the first half of 2023 to combat inflation:
During the same period, the average fixed rate for a 30-year mortgage trended higher, but not without dipping every now and then.
That’s why while decisions from the Fed can influence mortgage rates, it’s important to remember that other factors also play a role to avoid rate-watching paralysis. Keep an eye on overall market trends, but don’t let them stop you from making a move on your dream home or securing a great refinancing deal.
What happens to existing mortgages when the Fed changes rates?
If you’re already a homeowner with a fixed-rate mortgage, you can breathe easy. Just like CDs, your rate is locked in for the term of your loan, so Fed rate movements won’t affect your monthly payments. It means that if you snagged a 3.00% 30-year fixed mortgage in 2020, you get to keep this rate until 2050 — or until you sell or refinance — regardless of Fed rate changes.
However, if you have an adjustable-rate mortgage (ARM), you’ll want to pay close attention to how the Fed moves. ARMs typically adjust annually after an initial fixed-interest period. Every Fed rate cut opens the door to lower interest charges and monthly payments.
Dig deeper: What are the monthly payments on a $500,000 mortgage?
4. Investments and stock portfolios
The stock market and the Federal Reserve’s funds rate decisions share a complex relationship. When the Fed adjusts its federal funds rate, it sets off a domino effect that spreads through the stock market. Fed rate changes affect corporate borrowing costs and profits, shifting how attractive stocks are compared to other investments like bonds.
How do Fed rate changes affect the stock market?
Stocks often move inversely to Fed rate adjustments. When the Fed lowers rates, it often boosts the stock market, as companies are able to borrow more cheaply, potentially improving their profits. Lower Fed funds rates also decrease bond yields, rendering these investments less attractive and pushing investors toward stocks.
On the other hand, when the Fed increases rates, it might negatively affect the stock market. Higher Fed rates make it more expensive for companies to borrow money, which can eat into their profits and impact their stock performances. Meanwhile, fixed-rate investments like bonds become more attractive, paying out higher returns without the volatility of the stock market.
Should you reshuffle your stock portfolio when the Fed makes a move?
When rates change, you might be tempted to overhaul your stock portfolios. But keep in mind that drastic moves to economic news can easily backfire since you can end up tying your portfolio to a specific moment.
This can lead to higher portfolio volatility since its performance may heavily depend on how the stock market moves from this moment forward. Not to mention that it can increase your short-term capital gains tax if you sell investments that you held for less than a year. Instead, you should work with a financial advisor to build a calculated approach that protects your investments and long-term goals.
Dollar-cost averaging is a tried-and-true strategy that many financial experts recommend, no matter what the Federal Reserve does. With this simple strategy, you invest a fixed amount of money regularly regardless of current rates or stock prices. For example, you can invest $500 a month, and when the market is up, that investment buys more stocks; when the market is down, that investment buys fewer stocks. But your investment amount doesn’t change, which helps improve your portfolio’s performance by ironing out market volatility over time.
Dig deeper: Best low-risk investments for retirees
5. Credit card APRs
Annual percentage rates (APRs) determine how much it costs you to carry a balance on your credit card. Card issuers tie their APR rates to the prime lending rate, which typically sits at about 3.00% higher than the Fed funds rate. For instance, the prime rate rose to 8.50% in July 2023 just as the target Fed funds rate increased to a range of 5.25% to 5.50%.
How soon do credit card APRs change after a Fed rate decision?
Most credit cards come with variable APRs that move right along the federal funds rate. When the Fed increases this benchmark, credit card APRs follow suit within one or two billing cycles. This movement can quickly raise interest charges on your existing credit card debt.
The same is true when the Fed cuts the benchmark: You should see lower interest charges on any balance you carry over monthly within one or two billing cycles.
How to tackle existing credit card debt after Fed rate changes
Credit card debt will cost you more than most other types of debt, regardless of where the Fed funds rate sits. While Fed rate cuts can lower your interest charges, you’re nearly always better off moving high-interest card debt to a credit card that offers a 0% introductory APR on balance transfers.
To give yourself enough time to pay down your debt, look for credit cards that offer a 0% intro APR for 12 months or longer. For example, the Wells Fargo Reflect Card comes with a 0% intro APR on qualifying balance transfers for 21 months, after which it reverts to a higher variable APR. This long intro period helps you avoid interest charges for quite a while and can save you a lot of money in the process.
Dig deeper: 4 simple steps to pay off your credit card debt
3 factors that influence Fed rate decisions
The Federal Reserve sets the outlook of the country’s economy, evaluating various economic factors and market conditions at eight policy meetings each year.
Three key factors it considers are:
Inflation rates. An important part of the Fed’s focus is getting inflation as close to an average 2% as possible, and its primary tool for fighting inflation is adjusting the Fed funds rate. When inflation heats up, the Fed may respond by raising rates to slow it down. When inflation eases, the Fed lowers rates to encourage economic growth.
Employment data. A healthy job market reflects a strong economy, and the Fed closely watches unemployment rates and new job data to time its rate changes and avoid inducing a recession.
Overall economic growth. While many indicators focus on certain sectors of the economy, the Federal Reserve also looks at the overall growth of the U.S. economy. The Fed may lower rates during sluggish growth to promote more economic activity. On the other hand, it may increase rates during rapid economic growth to reduce the risk of inflation.
The Fed also keeps an eye on the housing market, future economic projections and global developments among other factors when deciding whether to lower or increase the benchmark interest rate.
Sources
Effective federal funds rate, Federal Reserve Bank of New York. Accessed on September 17, 2024.
National Rates and Rate Caps, FDIC. Accessed September 17, 2024.
30-Year Fixed Rate Mortgage Average in the United States, Federal Reserve Bank of St. Louis. Accessed on September 17, 2024.
Historical prime rate, J.P. Morgan Chase. Accessed on September 17, 2024.
FOMC structure, Federal Reserve. Accessed on September 17, 2024.
Editorial disclaimer: Information on this page is for educational purposes and not investment advice or a recommendation to buy any specific asset or adopt any particular investment strategy. Independently research products and strategies before making any investment decision.
About the writer
Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia’s expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.
Article edited by Kelly Suzan Waggoner
