Federal Reserve makes unusual rate cut. Here's what it means for you

The Federal Reserve on Wednesday cut its benchmark interest rate by an unusually large half-point, a dramatic shift after more than two years of high rates helped tame inflation but that also made borrowing painfully expensive for American consumers.

The rate cut, the Fed’s first in more than four years, reflects its new focus on bolstering the job market, which has shown clear signs of slowing. Coming just weeks before the presidential election, the Fed’s move also has the potential to scramble the economic landscape just as Americans prepare to vote.

Here's what Wednesday's move means:

How much did the Fed lower the interest rate?

The central bank’s action lowered its key rate to roughly 4.8%, down from a two-decade high of 5.3%, where it had stood for 14 months as it struggled to curb the worst inflation streak in four decades. Inflation has tumbled from a peak of 9.1% in mid-2022 to a three-year low of 2.5% in August, not far above the Fed’s 2% target.

Are more rate cuts coming?

The Fed’s policymakers also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. And they envision four more rate cuts in 2025 and two in 2026.

How will the rate cut impact you?

Rate cuts by the Fed should, over time, lower borrowing costs for mortgages, auto loans and credit cards, boosting Americans’ finances and supporting more spending and growth. Homeowners will be able to refinance mortgages at lower rates, saving on monthly payments, and even shift credit card debt to lower-cost personal loans or home equity lines. Businesses may also borrow and invest more.

Average mortgage rates have already dropped to an 18-month low of 6.2%, according to Freddie Mac, spurring a jump in demand for refinancings.

In a statement, the Fed came closer than it has before to declaring victory over inflation: It said it “has gained greater confidence that inflation is moving sustainably toward 2%.”

Though the central bank now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers even further.

Although taking action now to try to capitalize on lower rates, like shifting money out of a certificate of deposit or refinancing a mortgage, “might be warranted for some, you shouldn’t feel obligated to completely change up your financial strategy just because rates move lower," said Jacob Channel, a senior economist at LendingTree.

“Act cautiously and responsibly," Channel said, "and don’t make any rash decisions based on a single Fed meeting or economic report.”

Savings

Eventually, yields for savers will decline as the Fed lowers its benchmark rate.

“As attractive as yields on savings instruments have recently been, it’s wise not to hold too much in cash because these are short-term instruments and their yields are ephemeral,” said Christine Benz, director of personal finance at Morningstar. “The really great yields that we’ve had recently may go lower.”

If you don't have a need for cash right away, you can continue to lock in what are “still pretty decent yields on offer,” she said. In that case, “longer-term certificates of deposit might make sense.”

“Lower interest rates make it harder to maximize savings and preserve the capital built while interest rates have been higher,” said Matt Brannon, a personal finance expert at MarketWatch guides. “An easy short-term move to protect your savings is to shift your funds into a high-yield savings account, which offers higher interest rates than traditional savings accounts... These types of savings accounts will still help you to preserve capital due to comparatively higher interest rates.”

Credit card debt and other borrowing

“While lower rates are certainly a good thing for those struggling with debt, the truth is that this one rate cut isn’t really going to make much of a difference for most people,” said Matt Schulz, a credit analyst at LendingTree.

That said, the Fed's declining benchmark rate will eventually mean better rates for borrowers, many of whom are facing some of the highest credit card interest rates in decades. The average interest rate is 23.18% for new offers and 21.51% for existing accounts, according to WalletHub’s August Credit Card Landscape Report.

Still, “the best thing people can do to lower interest rates is to take matters into their own hands,” Schulz said. “Consolidating your debts with a 0% balance transfer credit card or a low-interest personal loan can have a far bigger impact on your debt load than most anything the Fed will do.”

Mortgages

The Fed’s benchmark rate doesn’t directly set or correspond to mortgage rates. But it does have a major indirect influence, and the two “tend to move in the same direction,” said LendingTree's Channel.

To wit, mortgage rates have already declined ahead of the Fed’s predicted cut.

“It goes to show that even when the Fed isn’t doing anything and just holding steady, mortgage rates can still move," he said.

Channel said that the majority of Americans have mortgages at 5%, so rates may have to fall further than their current average of 6.46% before many people consider refinancing.

Car loans

“With auto loans, it’s good news that rates will be falling, but it doesn’t change the basic blocking and tackling of things, which is that it’s still really important to shop around and not just accept the rate that a car dealer would offer you at the dealership,” said Greg McBride, an analyst at Bankrate. “It’s also really important to save what you can and be able to try to put as much down on that vehicle as you can.”

McBride predicts that the rate cuts and the avoidance of a recession will lead to lower auto loan rates, at least for borrowers with strong credit profiles. For those with lower credit profiles, double digit rates will likely persist for the remainder of the year.

Robert Frick, corporate economist for Navy Federal Credit Union, said that while he thinks a rate cut will work its way into auto loans, it probably won’t happen immediately and people with higher credit scores will likely benefit first.

Loans for new vehicles right now are averaging 7.1%, with used vehicle loans at a much higher 11.3%, according to Edmunds.com.

Those rates, coupled with still-high prices, have sent many possible buyers to the sidelines waiting for rates to drop. Partly as a result, U.S. new vehicle sales rose only a sluggish 2.4% through June.

High prices and rates have also led to more delinquent payments and defaults on auto loans, especially among people with lower credit scores. As a result, Frick said, many lenders will probably try to keep rates high to cover potential losses.

“Rates will be coming down, but we shouldn’t expect them to come down quickly overall,” he said.

Frick suggests waiting for additional Fed rate cuts to come through if possible, especially if you’re buying a used vehicle.

Jeff Schuster, vice president of automotive research for Global Data, said he doubts that modest rate cuts by the Fed will be enough to draw many buyers off the sidelines, unless automakers offer their own low-interest loans and other discounts.

“I think it’s going to take a couple more cuts before we get any substantial relief for those consumers,” he said.

Inflation and the job market

Consumer prices rose 2.5% in August from a year earlier, down from 2.9% in July — the fifth straight annual drop and the smallest since February 2021.

Hiring picked up a bit in August, and the unemployment rate dipped for the first time since March. Employers added 142,000 jobs, up from 89,000 in July. The unemployment rate declined to 4.2% from 4.3%, which had been the highest level in nearly three years.

Those signs indicate that the job market, though cooling, remains sturdy.

The rate at which the Fed continues to cut rates after September will depend in part on what happens next with inflation and the job market, in the coming weeks and months.

Student loans

Higher education expert Mark Kantrowitz told CNBC, federal student loan rates are also fixed, so most borrowers won't be immediately affected by a rate cut. Those with private loans, however, may have either a fixed or a variable rate, which means the rates on those could come down over a one- or three-month period, depending on the benchmark.

There could also be an opportunity for borrowers with variable private student loans to refinance, though that comes with its own caveats.