What the Fed’s rate cuts mean for your money

CNN
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The Federal Reserve cut its key overnight interest rate again on Thursday, after cutting it by half a percentage point in mid-September.

Fed observers also expect the central bank could cut interest rates again this year by another quarter point at its meeting in December.

If so, that would mean that the key interest rate, which directly or indirectly influences interest rates on a variety of consumer savings and loan products across the economy, would have fallen by a full percentage point by year’s end.

But that doesn’t mean interest rates are low now – or will be low soon. “’Falling interest rates’ is not the same as ‘low interest rates’.” Interest rates are high and won’t go down to “not so high” until 2025, Greg McBride said. Chief Financial Analyst at Bankrate.

Here’s a breakdown of how far interest rates on your savings, loans and investments have fallen and what experts expect for the future.

The interest rate environment is still not much friendlier for those in debt.

Credit cards: Just before the Fed cut interest rates in September, the average credit card interest rate was 20.78%, according to Bankrate. As of this week, it had only fallen to 20.39%, less than half a point.

That’s still well above the average rate of 16.3% seen at the start of 2022, before the Fed began raising interest rates to curb inflation. Even if the Fed gradually lowers interest rates over the next two years, credit card debt will continue to be the most expensive debt you have.

That’s why you always receive the same advice in every tariff environment. Pay off your credit cards as quickly as possible. If you qualify, try to find a balance transfer card that offers you 0% interest for up to 21 months and pays back as much of your principal as possible over that period.

“Using a 0% balance transfer credit card or low-interest personal loan to lower your interest rates and consolidate your debt can have a much greater impact on your debt load than most Fed actions,” said Matt Schulz, chief credit analyst at LendingTree.

Another option: Try transferring your balance to a credit card from a credit union or local bank. They may offer fewer perks but typically have lower interest rates, said certified financial planner Chris Diodato.

Mortgages: Since the Fed started cutting rates, mortgage rates have actually gone up.

That’s because they are directly linked to the direction of the 10-year Treasury yield, which typically depends on economic factors such as inflation and growth, as well as interpretations of the Fed’s future actions. As recent data has been strong, the 10-year note has been rising since mid-September.

As a result, the average interest rate on a 30-year mortgage was 6.79% as of Nov. 7, higher than the 6.2% recorded a week before the Fed’s September meeting. However, according to Freddie Mac, it is still well below where it was a year ago, when the average was 7.50%.

Following the US presidential election, Sam Khater, Freddie Mac’s chief economist, indicated that he expected some near-term risk that mortgage rates could rise as political uncertainty is currently high.

The fact that consumer interest rates have not yet fallen significantly, and in some cases not at all, benefits savers.

“Interest income on savings accounts, money markets and certificates of deposit will decline, but the most competitive returns still significantly outperform inflation,” McBride said.

Savings accounts: Traditional savings accounts continue to offer paltry returns, well below 1%.

The best return on cash savings comes from high-yield online savings accounts at FDIC-insured banks. Before the Fed cut interest rates in September, many of these accounts offered yields between 4.25% and 5.3%, according to data on Bankrate.com. On Thursday, yields on offer had fallen by about a quarter point, ranging from 4% to just over 5%, well above the recent inflation reading of 2.1%.

Certificates of Deposit: FDIC-insured CDs also still offer returns above inflation. Before the last Fed meeting, CDs listed on Schwab.com with terms ranging from three months to 10 years offered annual interest rates between 3.65% and 4.99%. On Thursday the range was between 4.25% and 4.60%.

Bonds: If you live in a high-tax jurisdiction, you might consider investing some cash in government bonds, which are not subject to state and local taxes; or in high-quality municipal bonds, which are generally exempt from federal and sometimes state and local taxes.

Short-term Treasury bonds (with maturities ranging from three months to a year) yielded 4.32% to 4.54% on Schwab.com Thursday. And government bonds (with a maturity of two to ten years) yielded between 4.19% and 4.35%. That’s well above the level in mid-September, when two- and 10-year bonds were at 3.6% and 3.64%, respectively.

Meanwhile, municipal interest rates have held up even in the face of Fed rate cuts because more of them have been floated in the run-up to the U.S. election, said Sinead Colton Grant, chief investment officer at BNY Wealth.

With expectations that the Fed is likely to cut interest rates further next year, Colton Grant said: “We prefer bonds, particularly as cash yields will decline.”

However, she expects volatility in bonds, which is why she favors actively managing the fixed income portion of your portfolio over the next year, whether through a separately managed account in your 401(k) or through an actively managed bond fund.

When interest rates are high, it’s easy and enjoyable to make money with your cash in a very low-risk way. But if they decline next year, many other gains will be lost.

Diodato now warns his clients not to fall into what he calls the “cash trap” of holding too much money in savings and money marketplaces, as this could harm your net worth over time, as stocks and bonds are largely and Overall, they performed better than the cash returns.

For this reason, he wouldn’t recommend storing more than six months to a year’s worth of living expenses in cash or cash equivalents unless you’re already retired or nearing retirement.

And Colton Grant urges sticking with a well-diversified portfolio overall, regardless of who wins the U.S. presidential election, as stocks continue to be driven primarily by earnings and interest rates. For example, she said BNY is overweight U.S. large-cap stocks due to its strong free cash flow and productivity gains from AI.

“If you look at how stock markets have performed over time under different governments, they have done well in all environments,” she said.