Here’s what the Fed’s interest rate cut means for your finances

The Federal Reserve Bank cut the federal funds rate by 0.5% at its September Board meeting, bringing the rate range to 4.75% to 5.0% and targeting a rate of 3.4% by the end of 2025. This marks the first rate cut since March 2020. and will undoubtedly serve as a benchmark for the lending market.

While a rate cut usually signals a sluggish economy, it can bring long-awaited relief to consumers who have been eyeing the housing market. This 0.5% interest rate cut will undoubtedly create ripple effects across most of the economy, impacting consumer credit, pension portfolios, the labor market, stock performance and savings accounts.

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A cut of 50 basis points will reduce the risk of a recession and likely improve consumer confidence, but could increase inflation and consumer prices. Although inflation has cooled considerably from a peak of 9.1% in June 2022, it has not yet reached the Fed’s 2% target, and consumers are still feeling it in their wallets.

Experts are divided on whether they agree with the rate cut; such a large rate cut is usually reserved for recessions. However, this reduction is also a welcome relief from three years of aggressive rate hikes, and consumers have been waiting for it.

However, a lower interest rate will have both positive and negative implications for most facets of the economy.

Borrowers and workers can reject with relief

Lower interest rates will most directly reduce the cost of borrowing. This rate cut is expected to be the first of many until the end of 2025 and will significantly reduce the cost of buying high-priced items such as houses and cars.

Consumer loans: Auto loans and mortgage applications are likely to see an uptick as consumers who have been waiting on interest rates may be ready to take the plunge. However, rates are expected to continue falling through 2025. Consumers may hold out until there is a visible correlation between the federal funds rate cut and lower mortgage rates.

Cars are the consumer product that will be most responsive to interest rate cuts, as there are no more supply chain bottlenecks affecting production and they will likely receive more affordable monthly payments.

Credit Card Debt: Although lower interest rates are generally a good sign for debt, credit card debt may be less affected by these rate cuts because credit card interest rates are much higher than federal rates and are reduced more rarely.

The average credit card interest rate is over 20%, and a reduction of less than one percentage point won’t make a drastic difference in your debt level. Experts suggest that those who carry debt focus on consolidating their balances at a lower rate.

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Labor market: The U.S. unemployment rate currently stands at 4.2%, and the shrinking labor market appears to be top of mind for the Fed. Employment rates and wages have both fallen, and the interest rate cut is meant to help improve employer and consumer confidence.

The hope is that lower interest rates will make it less expensive for businesses to borrow and encourage free spending, improving confidence in the economy and reducing unemployment.

Mark Malek, CIO at Siebert Financial, explains how rate cuts will benefit businesses and consumers. “Although lower interest rates are usually associated with a struggling economy, a lower interest rate environment provides consumers with a general sense of confidence,” he said.

“Easier monetary conditions are seen as beneficial for companies, which should ultimately strengthen the labor market. Knowing that one’s job is secure is an incredible confidence builder when it comes to purchasing big-ticket items like houses and cars.”

A couple is seen reviewing their finances and finances.

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Inflation: This interest rate cut shows that the Fed believes inflation is on track to be under control, although it has not yet reached its 2% target. Inflation is expected to continue to decline, although consumer prices are likely to remain high.

Conservative investments will see lower returns, but stocks can perform well

401(k)s, investment portfolios and savings accounts may see slower growth, but the stock market may recover from the rate cut.

Pension and investment portfolios: Lower interest rates can be a double-edged sword for 401(k) plans and investments — portfolios will accrue less interest, but the stock market tends to perform well after rate cuts.

Malek explains the correlation between rate cuts, stock performance and investor confidence. “It’s well known that consumers are more confident when stock markets are rising, even if those consumers don’t own stocks,” he said.

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“The S&P 500 rose in the year following the start of five of the last seven Fed rate cut cycles,” he explains. “If the shares favor a market rally, investors will certainly benefit from the rise in stocks and non-investors will become more confident.”

Stocks generally perform well after interest rate cuts, as lower borrowing costs can improve corporate profits and investment. Bonds also tend to do well when interest rates are low, so existing bondholders will likely see their value increase.

Savings Accounts and CDs: Conservative investments such as certificates of deposit (CDs), money markets and high-yield savings accounts will suffer because they are more directly tied to interest rates. Most of the fixed income products preferred by retirees, such as CDs and annuities, will have lower returns, meaning retirees may need to monitor their portfolio allocation.

Related: Veteran fund manager sees world of pain coming for stocks