There are a lot of important things to think about right now. But let’s focus on interest rates, which have a direct impact on your finances.

THE The Federal Reserve cut interest rates by 0.25% during today’s political meeting.

Interest is the cost you pay for borrowing money, whether through a loan or credit card. Lower interest rates mean the percentage you owe on your outstanding debt is smaller. Lower interest rates can also reduce the amount a financial institution or bank pays you, that is, how much you earn, for invest your moneylike with a savings account.

However just one drop in interest rates won’t immediately affect your wallet (or radically upend the economy as a whole), government monetary policy and the overall economic outlook will impact your money in the long run.

Here’s a quick look at interest rates and what you need to know about today’s Fed decision.

The Fed and interest rates

The Fed meets eight times a year to assess the health of the economy and set monetary policy, primarily by changing the federal funds rate, the benchmark interest rate used by U.S. banks to lend or borrow money. money overnight.

Even though the Fed does not directly set the percentage we owe on our credit cards And mortgagesits policies have a ripple effect on the everyday consumer.

Imagine a situation in which financial institutions and banks form an orchestra, and the Fed is the conductor, directing the markets and controlling the money supply. In this case, we’re all in the audience watching, and we might end up with a little less or a little more money in our pockets.

When the “maestro” of the central bank decides to increase the federal funds rate, many banks tend to increase their interest rates. This can make our debt more expensive (for example, a credit card APR of 22% versus a 17% APR), but it can also lead to higher savings returns (e.g. 5% APY vs. 2% APY).

When the Fed lowers rates, as it did in September and again today, banks tend to lower their interest rates as well. This may make our debt burden slightly less, but we won’t get as high a debt ratio. return on our savings.

Measuring inflation and the labor market

Financial experts and market watchers spend a lot of time predicting whether the Fed will raise or lower interest rates based on the direction of the economy, with particular emphasis on inflation and the labor market.

When inflation is high and the economy is in overdrive, the Fed attempts to put the brakes on by discouraging borrowing. It does this by setting higher interest rates and decreasing the money supply. Since March 2022, the Fed has raised the federal funds rate 11 times, which has helped slow record price growth.

However, the Fed takes a risk if it lowers inflation too much. Any large and rapid decline in economic activity can cause a significant rise in unemployment, leading to a recession. You may hear the term “soft landing,” which refers to the balance between keeping inflation under control and unemployment low.

The economy can neither be too hot nor too cold. Like the porridge in Goldilocks, it has to be perfect.

Because current inflation data is on track With Fed expectations, we will likely see further rate cuts through 2025.

What this Fed rate cut could mean for your money

When it comes to your money, the Fed’s rate decisions affect your credit card debt and whether you can afford a mortgage on a house. Interest rates even influence the amount annual percentage yield you earn from your savings account.

Here’s what today’s rate cut could mean for Credit card APR, mortgage rates and savings rates.

Credit card APR

The decline in the federal funds rate may cause credit card issuers to lower the price of credit for cardholders, meaning you’ll be charged less interest on your outstanding balance each month. You won’t feel the effects right away, and each issuer has different rules about changing annual rates. However, you may notice your APR adjusts after one to two billing cycles.

“Credit card debt is generally very expensive, and that won’t change even if the Fed makes multiple interest rate cuts this year. So don’t wait for the Fed to act, prioritize paying off credit high-interest debt right now If you receive an offer for a 0% APR introductory credit card or can apply for a personal loan with a lower APR, consider moving your debt to avoid incurring debt. paying more interest than necessary.“– Tiffany Connorseditor of CNET Money

Mortgage rates

Fed decisions impact overall borrowing costs and financial conditions, which influence the housing market and home loan rateeven though it is not a 1 to 1 relationship. For example, since the Fed began its series of rate hikes in March 2022, mortgage rates have climbedpeaking last fall. Although home loan rates rise and fall every day and are influenced by multiple factors, they remain high, keeping buyers out of the market.

“The Fed does not directly set mortgage rates. In fact, mortgage rates rose significantly after the Fed lowered rates by 0.5% in September due to strong economic data and political uncertainty. A 0.25% cut this month won’t immediately lead to a decline. That said, ongoing rate cuts next year, combined with weaker economic data, still point to a downward trend. long-term mortgage rates It just won’t happen as quickly as we’d like. — Catherine WattCNET Money Housing reporter

Savings rate

Savings rates are variable and move in lockstep with the federal funds rate, so your APY will likely decrease after further rate cuts. When the Fed began raising rates, many banks increased their APYs for traditional and high-yield savings accounts, providing account holders with higher returns on their deposits. Please remember that not all banks are equal and we monitor developments regularly. best high yield savings accounts And certificates of deposit on CNET.

“We’ve seen savings and CD rates decline since the Fed cut rates in September, and that trend is likely to continue. So now is the time to maximize your income by opening a savings account high-yield or CD The longer you wait, the lower your earning potential may be. — Kelly Ernsteditor of CNET Money

What’s Next for Fed Interest Rate Cuts?

Experts believe we can expect a continuing series of rate cuts over the next 12 months. However, market observers and economists generally have divergent opinions on the Fed’s monetary policy. All we can do is speculate roughly on when interest rates will fall and by how much.

Continue to follow CNET for Fed Day coverage. The decisions you make with your money are personal, but we’re here to guide you.