3 Ways the Federal Reserve’s Interest Rate Decisions Impact Your Money

It’s been in the news for a couple of weeks now, but if you’ve been having a news blackout (I don’t blame you, election years get pretty intense), Federal Reserve Chairman Jerome Powell has indicated that when the Federal Reserve Board next meets in mid-September, the federal funds rate is likely to be decreased.

This is huge for a whole lot of reasons, but it will have ripple effects when it comes to your finances and savings account, both for better and for worse. Here are a few ways that this change is very likely to affect the most people.

1. Savings interest rates will decrease

When we think of interest rates, we usually think of the stuff we’re paying for — cars, boats, houses, that really amazing lamp you put on a credit card (no judgment here, it was a once-in-a-lifetime buy). But we seldom think about the inverse of borrowing: saving.

Although the federal funds rate doesn’t directly impact interest rates, it is the rate banks use to lend money to one another, so it has a huge influence on where interest rates are set. The Federal Funds rate held steady at 5.33% for a whole year, pushing banks to offer higher savings rates if they wanted to use your money to lend out to make more money with.

Well, when the federal funds rate starts to drop, as experts like those at CME FedWatch predict will happen soon, so does the savings rate. If a bank can borrow more cheaply from its fellow banks, why wouldn’t it?

This is a good time to consider moving your long-term savings from a high-yield savings account into a certificate of deposit while rates are still high.

2. The cost of variable rate interest products will likely decrease

What do I mean by “variable rate interest loans”? Credit cards, lines of credit that aren’t fixed, even mortgage loans that have adjustable rates — all of these can be influenced by the federal funds rate. That’s not to say it’s a guarantee that your credit card company will reach out to tell you it’s dropped your rate, but it’s certainly a possibility.

FedWatch is only predicting a 0.25% decrease for the federal funds rate right now, so in September, the impact might not be huge. But by the end of December, it expects there could be as much as a full percentage point drop in the federal funds rate, which is extremely impactful, especially on longer loans or those that compound more frequently.

This may also be an issue when it comes to your student loans, if you’ve not managed to get your rate secured with fixed interest. Hang tight and see where it goes before you lock.

3. Investment yields may drop

If you’re an investor, especially one who deals in things like bonds or bills, you may see that the yields on newer issues are smaller and smaller. This is once again due to the influence of the federal funds rate. Since the government and those other bodies that raise money with bonds and bills will be able to borrow for less, they’ll be offering less to everyday investors, too.

This sounds like a bad deal, but it might not be. If you already have a collection of bonds or bills from the 5.33% federal funds rate period, you may be able to sell them for more than they’re worth on the secondary bond market, since no one will be able to get a return that high for a while. It’s not a guarantee that your active bonds will be worth more than you paid for them, but the potential exists.

Make sure that you fully understand what you’re giving up before you make a move, but it might be a chance for you to gain some liquidity to put into other sorts of investments.

Every move the Fed makes has knock-on effects

There’s a reason the Federal Reserve moves with such care and precision. Everything it does affects literally everything in the monetary system. Dropping the federal funds rate can mean that interest rates across the board drop, including the interest rates for savings accounts. This is good and bad, depending on where you are in the balance.