Latest Federal Reserve Interest Cut: 5 Things You Should Know

The Federal Reserve (a.k.a. “the Fed”) announced on November 7th, 2024 their decision to lower the target range for the federal funds rate by 0.25 percentage points. This is the second rate cut this year after a 0.5 percentage point drop made in September. But what does that mean for everyday people, businesses, and the economy? And what are some potential benefits of interest rate cuts for consumers that you may want to take advantage of?

In this article, we’ll break all this down in simple terms so you can understand how the Federal Reserve interest rate cut might affect your wallet, the cost of borrowing, the overall health of the economy, and things you can stay on top of to benefit from this change. And keep reading to find personalized financing offers through MoneyLion!

1. What is the Federal Reserve and Why Are They Dropping Rates?

The Federal Reserve is the United States’ central bank. One of its main jobs is to keep the U.S. economy running smoothly. They do this by controlling the supply of money and, importantly, by setting interest rates—specifically something called the federal funds rate.

The federal funds rate influences how much it costs for banks to borrow money from each other, which then affects the interest rates you see when you borrow money from the bank (like a mortgage, car loan, or credit card).

When the Fed decides to drop interest rates, it’s usually to help stimulate the economy. If the Fed thinks the economy is slowing down—meaning people aren’t spending enough or businesses aren’t investing as much—it can lower rates to encourage more borrowing, spending, and investment. Lower interest rates make borrowing cheaper, which puts more money into the system and can help boost the economy.

After the 2020 pandemic, the Fed worked to keep interest rates low to help boost the economy. However, as concerns about rising inflation later took hold, the Fed then moved to increase interest rates to try and combat rising prices.

2. What Does It Mean for You as a Consumer?

For everyday people, Fed interest rate cuts can have a few key impacts (and the good news is that many of them are beneficial!):

Cheaper Loans: If you’re planning to buy a house, refinance your mortgage, get a car loan, or take out a personal loan, you’re in luck! When the Fed drops interest rates, it often leads to lower interest rates on these types of loans. That means you’ll pay less in interest over time and may even have lower monthly payments.
- Example: If you’re buying a home, a lower interest rate could save you thousands of dollars over the life of a 30-year mortgage.
Lower Credit Card Interest: While credit card rates don’t always fall as quickly as other loans, a Fed rate cut can still lead to lower interest charges on any credit card debt you have. This means that over time, you may pay less to carry a balance on your card.
Savings and CD Rates: There’s a downside to rate cuts too. While borrowing becomes cheaper, savings accounts and Certificates of Deposit (CDs) may offer lower returns. If you’re saving money in a traditional savings account, the interest you earn might go down as well.
- Example: A savings account that earned 1.5% interest might only offer 1% or less after a rate cut, meaning you’ll earn less on your savings.

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One thing to keep in mind though is that not all of these changes will be instantaneous. Mortgage rates, for example, could take some time to decrease after a Fed rate cut as lenders adjust to the new rate environment.

3. What Does This Mean for Businesses?

For businesses, a drop in interest rates has both positive and negative effects:

Cheaper Business Loans: Just like consumers, businesses benefit from lower borrowing costs. If a company wants to expand, hire more workers, or invest in new equipment, lower interest rates make it easier to borrow money. This can lead to more business activity, which is good for the economy.
- Example: A small business that’s been thinking about opening a second location might now decide to move forward with those plans, thanks to lower loan costs.
Boost in Consumer Spending: When people have lower interest rates on loans and credit cards, they tend to spend more. This is good for businesses because more spending means more customers buying their products and services.
- Example: If more people are buying homes because of lower mortgage rates, businesses that sell home goods, appliances, and furniture may see a spike in sales.
Lower Returns on Investments: On the flip side, businesses that rely on earning money from interest (like banks) might make less profit when rates are lower. However, it’s possible that an uptick in demand for loans in a low-interest-rate environment could help offset some of the lost profits for lending institutions.

4. What Does This Mean for the Economy?

On a bigger scale, the Fed lowering interest rates is meant to help the overall economy in a few key ways:

More Spending and Investment: Lower rates make borrowing cheaper for everyone—people, businesses, and even governments. When borrowing costs go down, spending goes up, which can lead to more job creation, higher wages, and stronger economic growth.
Inflation Control: The Fed also cuts rates when they’re worried about economic growth potentially slowing. By cutting rates, they hope to make borrowing cheaper, encouraging people and businesses to spend more.
Stock Market Impact: Lower interest rates can also push people to invest in the stock market because returns on savings and bonds may not look as attractive. When more people buy stocks, the stock market often goes up, benefiting investors and retirement accounts.

5. Should You Make Any Changes?

If the Fed lowers interest rates, you might wonder what changes you should make in your own finances. Here are a few things to consider:

If you’re planning to buy a home or refinance a loan, this could be a great time to lock in a lower interest rate.
If you’re carrying credit card debt, you might want to take advantage of a lower rate by paying off as much debt as possible while the interest is lower.
If you’re saving for the long term, consider looking for higher-yielding savings options or investments, like bonds or stocks, to make sure your money continues to grow even in a low-rate environment.

The Bottom Line

A Federal Reserve interest rate cut can have widespread effects on everything from your personal finances to the overall economy. Lower interest rates mean cheaper borrowing costs for consumers and businesses, which can stimulate more spending and investment. While there may be some downsides, like lower savings account returns, the goal is to help the economy grow and keep things moving smoothly.

After the Fed decides to lower rates, it’s a good time to review your financial situation and be prepared to make any adjustments that could save you money or boost your financial health.