How Could Interest Rate Cuts Impact Me? [2024] What Interest Rate Cuts Could Mean 

In September, the Federal Reserve made the decision to cut interest rates after years of increases. The rate of inflation has stabilized, going from 9.1% in June 2022 to 2.4% this September. With this change, the Fed has decided to lower interest rates in hopes of giving the economy and job market a boost. 

While federal interest rates primarily impact banks, they can have an indirect effect on the economy at large, including your personal finances. If you’re wondering, “How could interest rate cuts impact me?” read on to learn how interest rates work, why they were cut, and how various areas of your life could be impacted. 

How Do Interest Rates Work? 

The Federal Reserve, also known as the Fed, is the central bank of the United States. It sets federal interest rates that affect many aspects of the national economy. These interest rates are also known as the federal funds rate. 

The federal funds rate is the rate at which banks and other commercial financial institutions borrow money from each other. Taking out short-term overnight loans is common practice among these financial institutions to meet reserve regulations and keep banking services stable for customers. 

For example, banks are required by law to keep a certain amount of money on hand, based on their demand levels and current obligations. However, a bank’s funds will fluctuate significantly each day, depending on the transactions processed. 

Banks that end up with extra funds at the end of the day will loan them to banks who are short overnight, with surcharges based on the current federal interest rate. For example, the current rate at the time of this publication is 4.75% to 5%. This means that a bank borrowing $100,000 would pay $4,750 to $5,000 in interest charges when paying back a short-term loan. 

At this point, you might be wondering: But how could interest rate cuts impact me? These federal interest rates have an impact on the overall economy. Banks, credit unions, and other lending institutions will consider the current federal interest rate when setting their own interest rates for mortgages, auto loans, business loans, and a variety of other financial products. We’ll dive into how you could be personally impacted in more detail a little later.  

Why Were Interest Rates Cut? 

The Fed increases and decreases rates strategically based on current economic conditions. In general, when inflation increases, the Fed increases interest rates along with it. This is because higher interest rates can slow down commercial spending, helping to keep inflation in check and the cost of consumer goods manageable. As inflation stabilizes, the Fed will cut interest rates to spur economic growth. 

The rate of inflation in the United States spiked in 2022 as the country was still recovering from the COVID-19 pandemic. This prompted the Fed to make a series of interest rate hikes, with rates peaking at 5.5% in July 2023. These interest rates then remained stable for over a year. 

In 2024, the rate of inflation started to stabilize. However, there have been concerns about stagnation in the job market as the unemployment rate has increased. The Fed decided to cut interest rates in hopes of giving the economy a boost, which historically has helped increase job growth. 

It’s likely that the Fed will continue to cut rates if inflation remains stable. The bank’s leaders face the unique challenge of weighing inflation against a wide range of other economic concerns. 

How Could My Life Be Impacted By Interest Rate Cuts? 

Federal interest rates have a ripple effect across the entire US economy. Although rate cuts directly affect financial institutions, those rates inform decisions in the consumer finance industry, which affects the economy at large. So how could interest rate cuts impact me and you? Here are some of the changes you might notice. 

Housing

This rate cut could be beneficial for Americans looking to purchase a new home. The federal interest rate indirectly affects mortgage rates. When the federal interest rate increases, mortgage rates increase, and vice versa. 

The rate hikes over the past few years have contributed to a challenging housing market in many parts of the United States. Many people have held off on buying a home due to a variety of factors. Not only have mortgage interest rates been very high, but supply has been low in many areas, which has driven home prices up even further. 

Now that federal interest rates have been cut, there’s a good chance that mortgage interest rates will go down as well. This could make it easier for consumers to purchase a home, or for existing homeowners to refinance their mortgages. 

These benefits could trickle down to renters and commercial real estate as well. As interest rates go down, some landlords may pass on these savings to their tenants. Additionally, many former renters may decide to purchase a home for the first time, which could reduce competition for rental units. 

Interest rates for commercial mortgages are also likely to decrease. This could stimulate new development in some areas, as finding an appropriate brick-and-mortar location will get less expensive. 

Investing and Saving

These interest rates could also indirectly affect the way Americans save money and plan for their financial future. Whether you’re building a traditional retirement portfolio or exploring alternative investments, these rate cuts could have an impact on your strategy. 

Some stocks may increase in price as an indirect result of the rate cuts while others may decrease. For example, stocks in the finance and real estate industries tend to see a bump after a rate cut. Learning how to invest in stocks can help you navigate these ups and downs and make informed financial decisions. Read our Robinhood review to learn more about mobile investing platforms. 

Bond prices also tend to increase when interest rates go down. So if you already have bonds in your portfolio, this change could be beneficial for you. Commodities like silver and gold also tend to increase in price following a rate cut. 

Your consumer savings account might earn slightly less interest following this rate cut. Some banks will reduce the interest that they pay their customers when federal interest rates drop, although the difference is usually negligible for the average person. 

Job Market

One of the biggest reasons why the Fed opted to cut interest rates in September was a stagnating job market. Unemployment rates have increased while job growth is slowing, meaning there aren’t as many job openings for professionals as there used to be. 

What interest rate cuts could mean is that the job market could stabilize in the coming months. Interest rates on corporate loans are likely to decrease, which makes it easier for businesses to borrow money when they need to. This can help prevent layoffs, and it also helps entrepreneurs get the funds they need to open new businesses and add new jobs to the market. 

Living Expenses

So how could interest rate cuts impact me in my day-to-day life? Interest rate cuts can have an indirect effect on the way you manage your daily living expenses, especially in terms of managing your debt. 

Interest rates for credit cards and personal loans are likely to decrease slightly, so if you need to use these financial tools to keep your finances in check, you’ll pay less in interest. Consumers will also be able to take out auto loans at a lower interest rate. 

Since consumer lending products will be more accessible, it’s important to be discerning when taking out a new loan or line of credit. Consider working with a financial advisor to manage your expenses in a way that reflects your long-term goals. What is a financial advisor? That’s a professional who can help you select investments and make other financial decisions. 

Commonly Asked Questions About How Could Interest Rate Cuts Impact Me? 

What Are Interest Rates? 

In general, interest rates are a surcharge for borrowing money, calculated as a percentage. For example, if a credit card had a 22% interest rate, that would mean the borrower would be charged $22 extra for every $100 on their outstanding balance each month.

Many banks and credit unions also pay interest on savings accounts, allowing customers to earn money. 

The federal funds rate, also known as the Fed interest rate, is the rate at which commercial banks lend money to each other. It’s normal for banks to take out short-term loans from each other overnight to meet their reserve requirements. 

This interest rate is set by the federal government. Although these rates don’t directly affect consumers, they can affect the economy at large. 

When Will Interest Rates Be Cut Again? 

The Fed cut interest rates for the first time in over four years in September 2024. Many financial experts anticipate that the government will cut rates again later in 2024 or in early 2025. However, it’s unclear exactly when these rate cuts could happen or how big they will be. 

Wondering, “How could interest rate cuts affect me?” These future cuts could reduce rates for mortgages, auto loans, credit cards, and business loans even further, making them more accessible. 

Will Interest Rate Cuts Stop Inflation?

No, the Fed typically increases interest rates to keep inflation in check. There’s often confusion among consumers about what interest rate cuts could mean for the economy at large. 

Inflation in the US spiked in 2022, which prompted the Fed to increase rates. Now that inflation has slowed down, The Fed has decided to make cuts, which could help spur economic growth. Further rate cuts could happen in the near future if inflation continues to remain stable. 

Will People With Little Money Benefit From Interest Rate Cuts? 

Many low-income and middle-class Americans wonder: How could interest rate cuts impact me? Federal interest rate cuts do have a trickle-down effect on the overall economy, affecting the interest rates consumers pay to borrow or that they receive for certain investments. 

However, these rate cuts are unlikely to have a big impact on your day-to-day life. You may notice that interest rates go down on personal loans, credit cards, auto loans, and other financial products you use, which can be helpful for consumers struggling with debt. This is a good time to look into investing for beginners and get your finances in order.