How the 2024 federal funds rate cut affects various aspects of your financial life. Discover the implications for borrowers, savers, and investors with our latest insights.
The federal funds rate cut announced on September 18, 2024, marks a significant shift in U.S. monetary policy, with far-reaching implications for consumers, businesses, and investors alike.
This post will explore how it might affect various aspects of your financial life, from borrowing costs to investment strategies.
FAQs
Q1: What exactly is the federal funds rate?
A1: The federal funds rate is the interest rate at which banks lend money to each other overnight to maintain their required reserves. It’s a key benchmark that influences many other interest rates throughout the economy.
Q2: How does the federal funds rate cut affect mortgage rates?
A2: While the federal funds rate doesn’t directly set mortgage rates, it can influence them. The recent rate cut may lead to lower mortgage rates, especially for adjustable-rate mortgages. Fixed-rate mortgages, which tend to follow the 10-year Treasury yield, have already seen decreases in anticipation of the Fed’s policy shift.
Q3: Will my credit card interest rate decrease due to the federal funds rate cut?
A3: Most likely, yes. Credit card rates are often tied to the prime rate, which typically moves in tandem with the federal funds rate. You likely will see a decrease in your credit card interest rate within a couple of billing cycles.
Q4: How will the federal funds rate cut impact my savings account?
A4: Unfortunately, the yields on savings accounts are likely to decrease following the rate cut. Banks may lower the interest rates they offer on savings accounts and certificates of deposit (CDs) in response to the Fed’s decision.
Fed Balances Inflation and Employment Risks
For the first time since its aggressive rate hikes from March 2022 to July 2023, the Federal Reserve has lowered the benchmark federal funds rate by half a percentage point to a range of 4.75% to 5.0%. This decision, aimed at maintaining the U.S. economy’s current strength, signals a potential soft landing – the rare achievement of curbing inflation without triggering a recession.
According to Fed Chair Jerome Powell, “The U.S. economy is in a good place. And our decision today is designed to keep it there.”
The Federal Reserve operates under a dual mandate to foster maximum employment and stable prices for the benefit of the American public.
For a couple of years rising prices have been considered the more serious threat, but the inflation rate has moved much closer to the Fed’s 2.0% target.
Officials now see these two risks as “roughly in balance”
In his post-meeting press conference, Fed Chair Jerome Powell said, “The labor market has cooled from its formerly overheated state, inflation has eased substantially from a peak of 7% to an estimated 2.2%, as of August.”2
Cooling Labor Market
In recent months, job gains have slowed considerably, and unemployment climbed from 3.8% in March to 4.2% in August. Powell maintained that employment data remains at solid levels, but recent changes suggest the downside risks have increased.3–4
Impact Of Federal Funds Rate Cut On Borrowing Costs
Lowering the federal funds rate helps to reduce borrowing costs across the board, creating breathing room in the budgets of many households and businesses.
The prime rate, which commercial banks charge their best customers, typically moves with the federal funds rate.
Though actual rates can vary widely, small-business loans, adjustable-rate mortgages, home equity lines of credit, auto loans, credit cards, and other forms of consumer credit are often linked to the prime rate, so the rates on these types of loans should adjust lower relatively soon after a federal funds rate cut.
Federal Funds Rate Cut And Falling Mortgage Rates
Borrowers with home equity lines of credit, adjustable-rate mortgages, credit card balances, or other outstanding loans with variable interest rates should see their monthly payments fall as well, in many cases within a couple of billing cycles.
Mortgage rates are influenced by a mix of complex factors that includes Fed policies, longer-term inflation expectations, and government bond market dynamics
The rates for 30-year fixed mortgages, which tend to track the yield on the 10-year Treasury note, fell steeply in August after government reports confirmed that inflation and the job market were cooling.5
The average rate on a 30-year fixed-rate mortgage was 6.09% on September 19, the lowest in 19 months. This is down from a recent peak of 7.22% in early May.
Aspiring home buyers have gained significant purchasing power since last spring and mortgage rates may continue to fall gradually, but it’s also possible that much of the anticipated decline in interest rates has already been priced in6
Too Much Cash On Hand?
Savers have enjoyed being rewarded for holding cash in high-yield savings accounts and short-term certificates of deposits (CDs). Although it may not happen overnight, they should be prepared for the yields on these accounts to follow the Fed funds rate downward.
Investors who have more cash savings than they expect to need in the next couple of years might consider locking into today’s relatively high yields by shifting money into CDs or bonds with fixed interest rates and longer terms.
For example, someone could purchase bonds that mature when the money is likely to be needed for retirement expenses or to pay for a child’s college education
Moving more money into stocks, which have historically generated higher average returns over time, is a riskier option that may be appropriate for investors who intend to hang on to them for the long haul, but only if they can endure frequent price swings.
The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. The return and principal value of an investment in bonds or stocks fluctuate with changes in market conditions and, when sold, these securities may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.
Federal Funds Rate Cuts In A Strong Economy
Past rate-cutting cycles have aimed to boost growth when the economy was in trouble, which doesn’t appear to be the case this time around.
Powell stated clearly, “The U.S. economy is in a good place. And our decision today is designed to keep it there.”7
In the second quarter of 2024, U.S. gross domestic product (GDP) expanded at a healthy 3.0% annual rate, and recent forecasts based on the Atlanta Fed’s GDPNow model indicate that the economy grew at a similar pace in the third quarter.8–9
The September rate cut — which officials hope will keep job market conditions from worsening — is presumably a starting point.
The Fed plans to keep cutting interest rates until they reach a neutral stance that should no longer impact the economy for better or worse.
According to current FOMC projections, the fed funds rate could drop an additional 0.50% by the end of 2024, and another 1.0% over 202510
It can take time for borrowing rates to respond to changes in the fed funds rate and noticeably impact the decisions of consumers and businesses. This “lag” in the effects of monetary policy is one reason that some people fear the economy is not out of the woods.
Whatever happens next, the Committee intends to make policy decisions “meeting by meeting based on the incoming data, the evolving outlook, and balance of risks.”11
Forecasts are based on current conditions, subject to change, and may not come to pass
Contact your tax and financial advisors to determine the best moves for your situation.