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The Fed’s Cutting Interest Rates. Here Are 2 Pros and Cons You Should Know About

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Image source: Getty Images

When the Federal Reserve opted to make its first interest rate cut in September, economists weren’t surprised. The Fed was expected to lower interest rates in response to cooling inflation.

The only aspect of that meeting that was a bit surprising was the fact that the Fed lowered its benchmark interest rate by half a percentage point, as opposed to a quarter of a point. A half-point cut is considered pretty aggressive. And in light of that, there’s a good chance the Fed will opt to make another half-point rate cut when it meets in early November.

At first, you might assume that the Fed’s rate cuts aren’t something you need to know or care about. But they actually have the potential to impact your finances in different ways — for better and worse. Here are two benefits and drawbacks you should know about.

Pro No. 1: Cheaper borrowing rates

Although the Fed doesn’t set consumer interest rates directly, when it lowers its benchmark interest rate, borrowing rates tend to follow. What this means is that as the Fed continues to cut rates, it could get a lot less expensive to sign a personal loan or finance a car. You may also find that a mortgage costs you less.

Of course, it’s always a good idea to shop around for the best rates when you’re looking to borrow. For example, you can click here for a list of the best personal loans if you have a large purchase you need to finance over the next few years.

But all told, you may find that you’re able to borrow more affordably in the coming months, especially if you have a good credit score.

Pro No. 2: Cheaper refinancing rates

If you signed an auto loan or mortgage last year, you may have paid up due to the fact that borrowing rates have been elevated. And if you’ve been struggling to make your payments, here’s some good news. Not only are borrowing rates expected to come down in the coming months, but refinancing an existing loan should also be more affordable.

So let’s say you signed a 30-year mortgage last year at 7.2%. The average 30-year mortgage rate as of this writing is 6.44%. But by early 2025, you may be looking at 6% instead. And if that’s the case, refinancing your mortgage could result in lower monthly payments and a lot of savings on interest over time.

Con No. 1: Lower savings account rates

Of course, there are downsides to the Fed’s rate cuts. One example is that in the coming months, savings accounts are likely to start paying less interest. If you have your emergency fund in your savings account, don’t move it out of there and over to a CD in anticipation of lower rates. You need to keep that money somewhere safe, and a savings account fits the bill.

But do look around for a better savings account rate if you find that yours drops a lot in the near term, or that it’s dropped a lot already. Check out this list of the best savings accounts to see if there’s a better home for your money.

Con No. 2: Lower CD rates

Just as savings account rates are likely to fall in the coming months, so too are CD rates. You’ll need to decide if a CD is worth it to you based on where rates land as a result of rate cuts.

As a general rule, a CD is a great place for money you’re saving for a short-term goal, while investing is a better bet for money earmarked for long-term goals. The good news, though, is that CD rates are still pretty competitive right now, even after the Fed’s large September rate cut. You may want to open a CD sooner rather than later, though, since rates are only likely to go down from here.

All told, the Fed’s interest rate cuts have the potential to be a mixed bag for your finances. It’s important to know how they might impact you so you can make smart decisions to benefit from them.

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