Fed Drops Interest Rates, Here’s What You Need To Know

The Federal Reserve announced it will lower the federal funds rate, the first rate drop since the onset of the pandemic. This follows the Fed holding interest rates at their highest level in over two decades to slow down inflation.

The Fed rate cut news is a moment of relief for millions of Americans struggling with higher interest rates on mortgages, credit card debt, personal loans, and student loans.

Here’s what you need to know about today’s rate cuts, what the Fed looks to do next, and how to use these rates to your advantage.

The Rate Cuts We All Wanted and Needed

The Federal Reserve has had a rough few years initiated by the Covid-19 pandemic.

In reaction to the pandemic economic shutdown in March 2020 and spiking unemployment, they lowered rates to near zero to incentivize spending and economic activity. This spurred many to scoop up real estate and other loans at a low cost. With the trillions of dollars in economic stimulus issued, money was abundantly available.

One year after the shutdowns, inflation skyrocketed to highs not seen since the 1980s. The Fed knew it had to take action. In March 2022, when inflation hit a staggering 8.5%, it began its rate-hiking campaign. Over the next 16 months, rates jumped 11 times from near zero to over 5%.

This slowed down borrowing dramatically, but unfortunately created significant economic pain. The number of new mortgages dropped substantially, and new car sales haven’t recovered to pre-pandemic levels. Delinquency rates on loans have soared. Consumer confidence remains 32% lower than pre-pandemic levels, the personal savings rate is down, and housing is now unaffordable for millions of people.

As inflation has slowed, many have been waiting for a positive signal from Fed Chair Jerome Powell and the central bank. In August, Powell proclaimed “the time has come” for rate cuts.

On Wednesday, Powell announced that the Fed rate cut would be 50 basis points (0.50%). This surprised several economists that called for a 25 basis points drop.

However, this isn’t the end of the Fed’s efforts to continue reducing rates and easing the economic pain.

Where Things Go From Here

There is a general consensus that the central bank will make more than one rate cut as it seeks a soft landing. Last month, Powell said, “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

There are also expectations that more rate cuts will be announced at the remaining Fed meetings this year (November 6-7 and December 17-18).

How To Consider Lower Interest Rates In Your Own Financial Life

The Fed rate cut news is a great time to reevaluate your finances. If you have outstanding debt, it could be an opportunity to reduce your interest costs.

Here’s what to consider:

• Consolidate your debt: If you have multiple debts that are overwhelming your budget, debt consolidation could help you consolidate everything into one place and potentially pay less interest over time. Top-rated personal loan companies, including online loan companies like Credible or LendingClub, can help.
• Refinance your student loans: If you have outstanding student loans, consider refinancing them. I refinanced my student loans several times to lower my interest rate and overall cost. It can also be beneficial to consolidate your loans into one private student loan.
• Consolidate existing credit card debt: If you have credit card debt, you would likely benefit from a 0% APR balance transfer credit card. This is when you move existing debt from a high-interest credit card to one with a 0% rate. The interest-free period is for a specified amount of time, but if you can pay off your balance within that timeframe, you’ll be able to save money on interest.

Compare Loan APRs After Fed Drops Interest Rates