After raising the federal funds rate a whopping 11 times between March 2022 and July 2023, the Federal Reserve just cut its benchmark interest rate by 50 basis points (0.50%) — taking that rate from 5.25%-5.50% down to 4.75%-5.00%. This economic move has implications for you and your finances.
While it’s easy to lament the loss of a higher APY on your high-yield savings account, there’s more to the story. Here are three reasons why the first federal funds rate cut should be cause to celebrate — at least a little bit.
1. It means inflation has finally eased
Just the sheer fact that the Federal Reserve cut the federal funds rate this week means that inflation has finally come back under control. That was part of the deal — lower inflation, lower interest rates. As of the most recent Consumer Price Index Summary report, inflation stood at 2.5% year over year.
You don’t have to look too far into the past to recall a time of much, much higher inflation. In June 2022, we had an inflation figure of 9.1% — ouch. That was the highest inflation in 40 years. But now we’re seeing much lower numbers (and potentially cheaper grocery bills), the Federal Reserve has begun to reverse course on interest rates.
2. You might have an easier time finding a job
A lower federal funds rate means lower interest rates across all types of borrowing (more on that below), and the benefits are likely to extend to your employer — or perhaps a future employer. Having cheaper and easier access to credit can give companies the ability to take on new projects and indeed, new employees. So if you’re checking out your employment options, you may have more in the near future.
3. Rates on different types of loans are likely to fall
While you may now watch the rates on your interest-earning bank accounts fall, you’re also likely to see rates on borrowed money fall. This could save you money, and potentially in a big way.
Are you carrying a credit card balance? Under basically all circumstances (with the exception of a 0% intro APR offer), credit card interest is expensive. According to the Federal Reserve Bank of St. Louis, for credit cards assessed interest, the average rate was 22.76% in May 2024. That can serve to make a revolving balance a lot more costly.
But roll back the data to before the current series of Federal Reserve rate hikes (which began in March 2022), and see that we had an average credit card interest rate of 16.17% in February 2022. Not cheap — but less than 22.76%. And credit cards are just one example.
You can expect to see rates start falling on personal loans, auto loans, and potentially mortgages, too. Other factors are involved in all of these interest rates, but in short, a lower federal funds rate means it becomes cheaper to borrow money. That should surely be worth cheering about, especially if you’re in the market for a new car or need to refinance repairs on your home.
The federal funds rate cut is a sign that Americans will soon be able to enjoy less financial stress. And that’s something we can all celebrate.