How Federal Reserve Interest Rate Cuts Can Impact You


Highlights:
- Interest rate cuts make it less expensive to borrow money.
- When federal funds rate drop, banks and credit unions lower rates on savings products.
- At a broader level, lower interest rates make it easier for businesses to invest in expansion.
The Federal Open Market Committee (FOMC) is part of the Federal Reserve System. They work to set monetary policy in the United States. One of their biggest responsibilities is to make decisions about interest rates. Interest rate cuts have some benefits for consumers, but also have some drawbacks. Learn more about how Fed interest rate cuts affect your life.
Understanding Interest Rate Cuts
When the FOMC reduces the federal funds rate, interest rates also tend to drop. The Federal Reserve acts as a central bank for the United States. It's responsible for implementing monetary policy. Their goal is to maximize employment without causing runaway inflation.
Although the FOMC meets eight times per year, interest rate cuts only happen when needed. The FOMC reduces interest rates to stimulate economic growth. For example, if inflation is too high, some businesses can begin to struggle. They can't afford to invest in equipment or materials to increase production.
How Interest Rate Cuts Impact Borrowing Costs
On the plus side, interest rate cuts make it less expensive to borrow money. When the FOMC lowers the federal funds rate, banks and other lenders tend to reduce their rates. This reduces the rates on mortgages, credit cards, auto loans and personal loans. Note that the rate decrease only applies to new accounts. For example, if you already have a mortgage, your rate won't go down unless you refinance your loan.
Rate cuts give you a valuable opportunity to refinance your existing debts. This can help reduce the amount of interest you pay over time. Refinancing may also help you qualify for a lower monthly payment or a shorter loan term. This can help make your debts more manageable.
Interest Rate Cut Effects on Savings and Investments
Although interest rate cuts are good for borrowers, they're not as good for savers. When the FOMC cuts interest rates, banks reduce the interest rates on savings accounts, CDs and other savings products. This reduces the amount of interest you can earn over time.
To counteract the negative effects of a rate cut, you may want to invest in high-yield bonds. High-yield bonds have higher interest rates because they're riskier than other bonds. If you're okay with a higher level of risk, you can earn more than you would with a traditional savings bond.
Effect on the Economy
Interest rate cuts help promote economic growth. The main way they do this is by making it easier for businesses to grow. Rate cuts reduce the cost of borrowing. This allows business owners to take out loans to buy land, equipment and raw materials. In some cases, a business owner can't afford to fill a large order. Loans can help cover the cost of producing new inventory. Rate cuts reduce the cost of this type of loan.
Besides fighting inflation, rate cuts may lead to lower levels of unemployment. When it's less expensive for business owners to borrow money, they can afford to fund new projects. This increases the demand for labor. The major risk with rate cuts is the possibility of earning less from investments.
Planning for the Future
You can't control the FOMC, but you can control what you do with your money. To prepare for future rate cuts, try locking in high rates on CDs and other savings products. If you lock in a rate before the FOMC acts, your bank will have to pay you that rate until your account matures. You should also consider moving money into a high-yield savings account. These tend to have a much higher interest rate than a standard savings account.
Once a rate cut occurs, take advantage of it by refinancing high-interest debts at lower rates. This can help you save a lot of money, leaving you prepared for changing economic conditions.

Whatever is on your horizon, there may be a personal loan option available to you.