The The Federal Reserve has cut interest rates 0.25% at the conclusion of today’s policy meeting. However, financing rates are likely to remain high for some time because Fed press release“the economic outlook is uncertain.”
Maybe you don’t want to hear about interest rates during the holiday season. But now many of us are thinking about spending and borrowing.
The Fed’s interest rate decisions affect you credit card debt and whether you can afford a car loan or mortgage. Interest rates even affect how much annual interest income you earn from you savings account.
while one percent discount will not directly affect your finances (nor immediately destabilize the economy), the government’s monetary policy and general economic outlook will not affect your money in the long term.
A quick look at what you need to know about interest rates and today’s Fed decision.
How the Fed sets interest rates
Interest is the cost you pay to borrow money through a loan or credit card. Lower interest rates mean that the interest you owe on your outstanding debt is smaller. Low interest rates can also reduce the amount the financial institution or bank pays you, which is what you earn. you invest your moneysuch as a savings account.
The Fed meets eight times a year to assess the health of the economy and set monetary policy, primarily through changes to the federal funds rate, the standard interest rate that US banks use to lend or borrow money to each other overnight.
Although the Fed does not directly set the interest rate on our debt credit cards and mortgageits policies have a ripple effect on the everyday consumer.
Imagine financial institutions and banks forming an orchestra, with the Fed as the conductor, directing the markets and controlling the money supply.
When the central bank “maestro” raises the federal funds rate, many banks tend to raise interest rates. This can make the debt we carry more expensive (for example, a 22% credit card with a 17% APR), but it also higher savings returns (eg 5% APY and 2% APY).
When the Fed cuts interest rates, as it has three times this year, banks tend to cut rates too. Our debt is getting a little harder (though not by much) and we won’t be borrowing as much. comes from 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 interest rates based on the direction of the economy. inflation and the labor market.
When inflation is high and the economy is overstretched, the Fed tries to put on the brakes by stopping borrowing. It does this by setting higher interest rates and reducing the money supply. The Fed has raised the federal funds rate 11 times since March 2022, helping to slow record price increases.
However, the Fed takes a risk if it cuts inflation too low. Any serious, rapid decline in economic activity could lead to a sharp increase in unemployment and a recession. You may hear the term “soft landing” referring to the balancing act of keeping inflation and unemployment low.
The economy cannot be too hot or too cold. Like porridge for Goldilocks, it has to be just right.
As economic activity continues to expand and inflation remains somewhat elevated, the Fed is likely to keep interest rates high through 2025. That means fewer rate cuts next year, especially if the Trump administration pursues economic policies that reignite inflation.
How the 0.25% interest discount affects your wallet
Here’s what today’s rate cut could mean credit card APRs, mortgage interest and savings rates.
🏦 Credit card APRs
Lowering the federal funds rate can cause credit card issuers to lower the cost of credit for cardholders, meaning less interest will be charged on your outstanding balance each month. You won’t feel the effects right away, and each issuer has different rules for changing annual interest rates. However, you may see your APR adjust within a billing cycle or two.
“Credit card APRs have remained high, even after several interest rate cuts this year. For those struggling to pay off credit card debt, don’t wait to see if the Fed makes more cuts in 2025. will continue. Your smartest move at this point is to pay off your credit card balance every month or as soon as possible.” — Tiffany ConnorsCNET Money editor
🏦 Mortgage interest
The Fed’s decisions affect overall borrowing costs and financial conditions, which in turn affects the housing market and home loan interest ratesalthough this is not a 1-to-1 relationship. For example, after the Fed starts raising interest rates in March 2022, mortgage rates have risenpeaked last fall. Although home loan rates move up and down daily and are affected by many factors, they remain high and keep home buyers out of the market.
“The Fed doesn’t directly set mortgage rates, so another 0.25% cut this month won’t lead to an immediate drop in mortgage rates. Continued rate cuts over the next year, combined with weaker economic data, will still keep long-term interest rates low.” The long-term downward trend for mortgage rates is not going to happen as quickly as everyone would like.” — Katherine WattCNET Money housing reporter
🏦 Savings rates
Savings rates are variable and move in step with the federal funds rate, so the APY will drop after more interest cuts. When the Fed began raising rates, many banks increased their APYs for traditional and high-yield savings accounts, giving account holders greater returns on their deposits. Remember that not all banks are created equal and we monitor banks regularly best high yield savings accounts and certificates of deposit on CNET.
“CD and savings APYs fell after the Fed cut rates in September and November, and another cut in December will mean they’ll fall even further. If you have extra cash, keep it in a CD or high-yield savings account. Rates now allowing you to maximize your profit before it goes down any further.” — Kelly ErnstCNET Money editor
What’s next for interest rate cuts?
Experts expect the potential for two rate cuts next year, although forecasts have changed given the potential impact of the new administration’s economic policies. While market watchers and economists typically have differing views on the Fed’s monetary decisions, the pace of interest rate cuts will depend on labor market, inflationary pressures and other political and financial developments.
Stay tuned to CNET for Fed Day coverage. The decisions you make with your money are personal, but we’re here to guide you.
https://www.cnet.com/a/img/resize/5d20eaa40813473448f38af9fc5f8d6602e2b943/hub/2024/11/07/255be99d-a245-4e05-86c4-1c531156c360/fed-watch-4.png?auto=webp&fit=crop&height=675&width=1200
Source link
