Today, the Federal Reserve has reduced interest rates by 0.25%. The Federal Open Market Committee lowered its benchmark overnight borrowing rate to a target range of 4.50% to 4.75%.
Lowering interest rates decreases the cost of borrowing money and reduces the amount owed on existing debt. However, it also results in lower earnings from investments such as savings accounts. While a single interest rate cut may not immediately affect your finances or the broader economy, the government’s monetary policy will have a long-term influence on your financial situation.
What is “The Fed,” and what is its purpose?
The Federal Reserve has a dual mandate goal of maximum employment and stable prices for the benefit of the American people. The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options. The Committee holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
The Fed and interest rates
A vital tool in this process is the federal funds rate, the benchmark interest rate for overnight lending between U.S. banks. This rate influences consumer loans and business investments to promote economic stability and growth. Although the Fed does not directly set the interest rates we owe on our credit cards and mortgages, its policies have a ripple effect.
Measuring inflation and the job market
Financial experts closely monitor the Federal Reserve (the Fed) to predict changes in interest rates, focusing on inflation and the job market. When inflation is high, the Fed may raise interest rates to cool the economy by making borrowing more expensive. Since March 2022, the Fed has raised the federal funds rate 11 times to counter rapid price growth. However, excessive reduction of inflation could lead to decreased economic activity, higher unemployment, and potential recession. The term “soft landing” describes the challenge of controlling inflation while maintaining low unemployment. As current inflation data aligns with the Fed’s expectations, more rate cuts are likely until 2025.
Rate Cut and Your Bottom Line
Concerning your finances, the Federal Reserve’s interest rate choices impact your credit card debt and your ability to afford a mortgage for a home. Here’s how today’s rate cut might affect you.
Credit card APRs
Lowering the federal funds rate can reduce interest charges on credit cards for cardholders. While the effects may not be immediate, card issuers often adjust annual percentage rates (APRs) within one to two billing cycles.
Mortgage rates
The Fed’s decisions affect borrowing costs and financial conditions, which influence the housing market and home loan rates, though not directly. Since the Fed began raising rates in March 2022, mortgage rates have increased significantly, peaking the previous fall. Despite daily fluctuations influenced by various factors, home loan rates remain high, deterring potential homebuyers from entering the market.
Savings rates
Savings rates are variable and move with the federal funds rate, so your APY will likely go down following more rate cuts. When the Fed started raising rates, many banks increased their APYs for traditional and high-yield savings accounts, giving account holders more significant returns on their deposits.
What’s next for the Fed?
Experts anticipate additional rate cuts over the next 12 months. The final meeting of 2024 is next month, and another .25% is possible. However, It is essential to remember that no one has a crystal ball, and all talk is simply speculation. Market watchers and economists usually have varying opinions about the Fed’s monetary policy. We will have to wait and see. As always, we remind you to make your financial decisions in line with your overall financial plan. Tune out the noise and focus on your goals, needs, and timeline.
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