Topline

The Federal Reserve is widely expected to announce its first interest rate in years on Wednesday. The move will have a major impact on the finances of all Americans, as borrowing becomes cheaper. However, the golden age of high-yield savings vehicles may be over.

Key Facts

What do Federal Reserve rate cuts do?

The Fed officially controls only the federal funds rate, which sets the interest rate charged on overnight cash reserve transactions between banks. But the central bank’s rate decisions affect borrowing costs across the board, since lenders typically set rates based on the Fed’s set range, and rate cuts will also ripple through the economy more broadly. Here are some of the most tangible ways rate cuts will affect ordinary Americans:

Housing

Mortgages may pose the most obvious shock to consumers from rate cuts, since mortgage rates are closely tied to Treasury yields, which in turn reflect the Fed’s monetary policy. Mortgage rates hit a 19-month low of 6.2% on 30-year fixed loans last week as brokers braced for looming rate cuts, and the downward slide is likely to continue as the Fed prepares to cut rates further.

Car loans

Consumer loans are getting cheaper with lower Fed rates, including auto loans, which are now at their most expensive rate since 2001, up from less than 5% for new auto loans in 2021 to about 8.7%. The cost of other debt, such as variable private student loans and credit card interest, should also fall.

Labor market

Businesses will also benefit from more accessible credit. Lower rates are typically associated with more friendly hiring, as employers’ profits are boosted by cheaper borrowing costs.

Savings

Perhaps the most material negative change to Americans’ finances from rate cuts is that high-yield savings accounts, certificates of deposit and money market funds that have offered attractive returns to savers over the past two years will lose some of their luster. They are closely tied to the federal funds rate, meaning that yields on those accounts will fall rapidly if the Fed cuts.

How rate cuts affect stocks

Rate cuts are typically seen as a boon to stocks, as they shift money away from lower-yielding Treasuries and money market funds, sending investors searching for more attractive yields. The benchmark U.S. S&P 500 stock index has risen 86% of the time in the 12 months since the first rate cut in a cycle dating back to 1929, according to Charles Schwab.

In return for

While interest rates are poised to fall, the U.S. is unlikely to return to the low interest rates that have become the norm. The Fed is forecasting a long-term federal funds rate of 2.8%, higher than rates were ever seen from March 2008 through September 2022 and a far cry from the near-zero rates enacted from December 2008 through December 2015 and March 2020 through March 2022.