What financial impacts can you expect when the Fed finally cuts rates? (2024)

FAQs

What financial impacts can you expect when the Fed finally cuts rates? ›

1. The Fed's decisions influence your borrowing costs. When the Fed's interest rate falls, so, too, will the borrowing costs consumers pay — on everything from the cost of financing purchases with a credit card to car loans and personal loans.

What it means for markets and investments. In light of a slowing economy and cooling of inflation, a reduction in interest rates would likely lead to lower borrowing costs for businesses too, which could stimulate economic growth by encouraging expansion and new hiring.

A rate cut by the Fed is also widely expected to provide more immediate relief to the Indian rupee, which fell to an all-time low against the greenback last week. Cutting ahead of the Federal Reserve or alongside it, would have risked pushing the rupee lower, further adding to inflationary pressures.

Lowering the fed funds rate has the opposite effect. It reduces short-term interest rates throughout the economy, increasing the supply of money and making it cheaper to get credit.

A larger Fed rate cut on Wednesday “may well drive the dollar to new lows,” while a smaller 25-basis-point reduction “would likely initiate far less currency volatility,” said Joe Tuckey, head of foreign-exchange analysis for Argentex, a London-based provider of currency-risk management and payment solutions.

A rate cut could help consumers save money by reducing interest payments on certain types of financing that are linked to prime or other rates, which tend to move in tandem with the Fed's target rate.

Despite all this, stocks have been higher one year after rate cuts commenced two-thirds of the time. The median return on the S&P 500 in the year after Fed rate cuts begin is 10.8%, with the six-month median return at 9.1%.

Lower rates make borrowing money cheaper. This encourages consumer and business spending and investment and can boost stock prices. Lower rates can also lead to inflation, which undermines the effectiveness of low rates. Higher rates discourage spending and can depress company returns and, therefore, stock prices.

An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending.

As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down.

What are the effects of cutting interest rates? ›

According to Kopiecki, a rate cut would directly affect short term borrowing like credit cards and car loans. Mortgage rates may be affected too, but those have already come down with new jobs reports showing a slight change in unemployment.

The opposite dynamic — falling interest rates — tends to be “dollar negative,” Petersen said. A weaker dollar means Americans can buy less abroad. Fed officials in June signaled they expect to cut rates once in 2024 and four additional times in 2025.

The Effect of Interest Rates

Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency. Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value.

Typically, a succession of Fed rate cuts leads over time to lower borrowing costs for things like mortgages, auto loans, credit cards and business loans. “I'm 100% sure it would make a difference,” Mardis said. “I'm looking forward to it.” At the same time, plenty of uncertainty still surrounds this week's Fed meeting.

One of the most immediate effects of a Fed rate cut is the potential for lower mortgage rates. For prospective homebuyers, this can mean lower monthly payments or the ability to buy a more expensive home than they otherwise could.

If the Fed decides to cut rates by more than 25 basis points or signals a more dovish stance (indicating further rate cuts in the future), it could indeed trigger a fresh rally in gold prices.

This higher interest rate cycle has been good news for CDs. As the Fed pushed rates up, certificates of deposit earned more. A 12-month CD was earning 1.72% monthly interest in July 2023. A year later, the same term CD is paying 1.850%.