What the Fed rate cut will mean for your finances

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NEW YORK (AP) — The Federal Reserve cut its benchmark interest rate Wednesday for the first time in nine months. Since the last cut, progress on inflation has slowed while the labor market has cooled. That means Americans are dealing with both high prices and a challenging job market.

The federal funds rate, set by the Federal Reserve, is the rate at which banks borrow and lend to one another. While the rates that consumers pay to borrow money aren’t directly linked to this rate, shifts in Fed policy affect what people pay for credit cards, auto loans, mortgages, and other financial products.

Wednesday's quarter-point cut is the first since December and lowers the Fed's short-term rate to about 4.1%, down from 4.3%. The Fed projected it will cut rates two more times before the end of the year.

The Fed has two goals when it sets the rate: one, to manage prices for goods and services, and two, to encourage full employment. This is known as the “dual mandate.” Typically, the Fed might increase the rate to try to bring down inflation and decrease it to encourage faster economic growth and more hiring. The challenge now is that inflation is higher than the Fed's 2% target but the job market is weak, putting the Fed in a difficult position.

“The dual mandate is always a balancing act," said Elizabeth Renter, senior economist at personal finance site NerdWallet.

Here's what to know:

For prospective homebuyers, the market has already priced in the rate cut, which means it's “unlikely to make a noticeable difference for most consumers at the time of the announcement,” according to Bankrate financial analyst Stephen Kates.

“Much of the impact on mortgage rates has already occurred through anticipation alone,” he said. "(Mortgage) rates have been falling since January and dropped further as weaker-than-expected economic data pointed to a cooling economy.”

Still, Kates said a declining interest rate environment will provide some relief for borrowers over time.

“Whether it’s a homeowner with a 7% mortgage or a recent graduate hoping to refinance student loans and credit card debt, lower rates can ease the burden on many indebted households by opening opportunities to refinance or consolidate,” he said.

For savers, falling interest rates will slowly erode attractive yields currently on offer with certificates of deposit (CDs) and high-yield savings accounts.

Right now, the best rates on offer for each have been hovering at or above 4% for CDs and at 4.6% for high-yield savings accounts, according to DepositAccounts.com.

Those are still better than the trends of recent years, and a good option for consumers who want to earn a return on money they may want to access in the near-term. A high-yield savings account generally has a much higher annual percentage yield than a traditional savings account. The national average for traditional savings accounts is currently 0.38%.

There may be a few accounts with returns of about 4% through the end of 2025, according to Ken Tumin, founder of DepositAccounts.com, but the Fed cuts will filter down to these offerings, lowering the average yields as they do.

Americans have faced steeper auto loan rates over the last three years after the Fed raised its benchmark interest rate starting in early 2022. Those are not expected to decline any time soon. While a cut will contribute to eventual relief, it might be slow in arriving, analysts say.

“If the auto market starts to freeze up and people aren’t buying cars, then we may see lending margins start to shrink, but auto loan rates don’t move in lockstep with the Fed rate,” said Bankrate analyst Stephen Kates.

Prices for new cars have leveled off recently, but remain at historically high levels, not adjusting for inflation.

Generally speaking, an auto loan annual percentage rate can run from about 4% to 30%. Bankrate’s most recent weekly survey found that average auto loan interest rates are currently at 7.19% on a 60-month new car loan.

Interest rates for credit cards are currently at an average of 20.13%, and the Fed's rate cut may be slow to be felt by anyone carrying a large amount of credit card debt. That said, any reduction is positive news.

“While the broader impact of a rate reduction on consumers’ financial health remains to be fully seen, it could offer some relief from the persistent budgetary pressures driven by inflation,” said Michele Raneri, vice president and head of U.S. research at credit reporting agency TransUnion.

“These savings could contribute to a reduction in delinquency rates across credit card and unsecured personal loan segments,” she said.

Still, the best thing for anyone carrying a large credit card balance is to prioritize paying down high-interest-rate debt, and to seek to transfer any amounts possible to lower APR cards or negotiate directly with credit card companies for accommodation.

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The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.