What the Fed’s interest rate cuts mean for your money

The Federal Reserve cut its key overnight lending rate again on Thursday, following on the heels of a half-point cut in mid-September. Fed watchers also expect the central bank may cut the rate once more this year, by another quarter point, at its December meeting. If so, that would mean the fed funds rate, which directly or indirectly influences the rates on a host of consumer savings and lending products across the economy, would have dropped by a full percentage point by year-end. But that doesn’t mean as a result interest rates are now low — or will soon be low. “‘Falling interest rates’ are not the same as ‘low interest rates.’Interest rates are high and will only decline to ‘not as high’ as … we move into 2025,” said Greg McBride,chief financial analyst at Bankrate. Here’s a breakdown of how far rates have fallen on your savings, loans and investments, and what experts see going forward.

Assessing your debts

The rate environment is still not much friendlier for those carrying debt. Credit cards: Just before the Fed cut its key rate in September, the average credit card rate was 20.78%, according to Bankrate. As of this week, it had only fallen to 20.39%, less than half a point. That is still well above the 16.3% average rate recorded at the start of 2022, before the Fed started hiking rates to beat back inflation. So even if the Fed keeps cutting rates gradually over the next two years, carrying credit card debt will continue to be the most expensive debt you carry. That’s why you will always get the same advice in any rate environment. Pay down your credit cards as quickly as you can. If you qualify, try to find a balance-transfer card that will offer you up to 21 months at 0% interest and pay as much of your principal down during that period as possible. “Using a 0% balance transfer credit card or a low-interest personal loan to lower your rates and consolidate your debt can have a much bigger impact on your debt load than most anything the Fed will do,” said Matt Schulz, chief credit analyst at LendingTree. Another option: Try transferring your balance to a credit card from a credit union or local bank. They may offer fewer perks but typically have lower rates, said certified financial planner Chris Diodato. Mortgages: Since the Fed started cutting rates, mortgage rates have actually gone up. That’s because they’re directly tied to movements in the 10-year Treasury yield, which typically moves on economic factors such as inflation and growth, and interpretations of the Fed’s future moves. Since recent data has come in strong, the 10-year has moved higher since mid-September. Consequently, the average rate on a 30-year mortgage hit 6.79% as of November 7, above the 6.2% registered a week before the Fed’s September meeting. Nevertheless, it is still well below where it was a year ago, when the average hit 7.50%, according to Freddie Mac. In the wake of the US presidential election, Sam Khater, Freddie Mac’s chief economist, indicated that he expects some risk in the short term that mortgage rates may drift higher because policy uncertainty is now high.

Low-risk ways to earn money on savings

The fact that consumer interest rates haven’t fallen a lot yet — and in some cases not at all — is benefiting savers. “Interest earnings on savings accounts, money markets and certificates of deposit will come down, but the most competitive yields still handily outpace inflation,” McBride said. Savings accounts: Traditional savings accounts continue to offer paltry returns, well below 1%. The best return on cash savings is in online high-yield savings accounts at FDIC-insured banks. Before the Fed’s September rate cut many of those accounts were offering yields between 4.25% and 5.3%, according to those listed on Bankrate.com. On Thursday, the yields on offer had fallen by a quarter point or so, ranging between 4% and a little over 5%, well above the latest inflation reading of 2.1%. Certificates of deposit: FDIC-insured CDs are also still offering inflation-beating returns. Before the last Fed meeting, CDs listed on Schwab.com with maturities ranging from three months to 10 years were offering annual rates of between 3.65% and 4.99%. As of Thursday, the range was 4.25% to 4.60%. Bonds: If you live in a high-tax area, you might consider putting some cash into Treasuries, which are not subject to state and local taxes; or into high-quality municipal bonds, which are typically exempt from federal tax, and sometimes state and local taxes too. Short-term T-bills (with durations of three months to a year) were yielding 4.32% to 4.54% on Thursday on Schwab.com. And Treasury notes (with durations of two to 10 years) were yielding between 4.19% to 4.35%. That’s well above where they were back in mid-September, when the two- and 10-year notes were at 3.6% and 3.64%, respectively. Muni rates, meanwhile, have held up even in the face of Fed rate cuts because more of them have been coming online in the runup to the US election, said Sinead Colton Grant, chief investment officer at BNY Wealth. Given expectations that the Fed will likely continue cutting rates next year, Colton Grant said, “We favor bonds, particularly as cash yields are going to move lower.” But she does expect volatility in bonds, which is why she favors active management for the fixed income part of your portfolio over the next year — whether through a separately managed account in your 401(k) or through an actively managed bond fund.

Don’t overinvest in low-risk options

Making money in very low-risk ways on your cash is easy and gratifying when rates are high. But as they start coming down in the next year, you forfeit a lot of other gains. Diodato now cautions his clients against falling into what he calls “the cash trap” and keeping too much money in savings and money markets because it could hurt your net worth over time given that stocks and bonds broadly have outperformed cash yields. That’s why, unless you’re already in or near retirement, he would not recommend keeping more than six months’ to a year’s worth of living expenses in cash or cash equivalents. And Colton Grant urges sticking with a well-diversified portfolio overall, regardless of who wins the US presidential election, because equities will still primarily be driven by earnings and interest rates. For instance, she said, BNY has been overweight in US large cap stocks because of their strong free cash flow and productivity gains from AI. “Over time when you look at how equity markets have performed under different administrations, they’ve done well under all environments,” she said.