Federal Reserve cuts benchmark interest rate: Here’s what it means

The Federal Reserve recently cut its benchmark interest rate by a half-point after more than two years of high rates “that helped tame inflation but also made borrowing painfully expensive for American consumers,” according to the Associated Press.

The cut is the Fed’s first in more than four years, and has brought the federal borrowing rate down between 4.75% and 5%.

“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to two percent,” Jerome Powell, Federal Reserve chairman announced last month.

Interest rates can be understood as “the price of borrowing money,” according to U.S News & World Report.

In the case of Federal Reserve interest rates, federal funds provided by Federal Reserve, or the U.S central bank, refers to funds available for banks to borrow.

Interest rates set by the Federal Reserve affects the rate banks pay to borrow money which affects the interest rates of loans of individual borrowers.

This affects mortgage loans, car loans and more.

The central bank’s decision to lower its rate last month marks the first time it’s been down from a two-decade high of 5.3% interest rate, “where it had stood for 14 months as it struggled to curb the worst inflation streak in four decades,” AP reported.

Inflation has dipped down from its peak of 9.1% in 2022, to a three-year low of 2.5% in August 2024, according to AP.

Policymakers have signaled they expect to cut their rate by an additional half-point during their final two meetings of 2024 in November and December, with four more rate cuts in 2025 and two in 2026, AP reported.

“Lower interest rates means cheaper loans, and cheaper loans should mean more spending to help financial markets recover,” U.S News & World Report said.

“More spending also tends to spur inflation, so the Fed closely watches inflation numbers. If inflation gets too high, the Fed may opt to increase interest rates,” U.S News & World Report said.

“The Fed maintains an annual inflation target of 2%, meaning goods and services get 2% more expensive each year.” The Fed’s next policy meeting is Nov. 6-7.

What do changing interest rates mean for you?

Changing interest rates may impact a borrower’s ability to afford “major life purchases, such as a home, a car and even a college education,” according to U.S News & World Report.

Lower interest rates help borrowers afford mortgages and refinances, though it can also fuel a more competitive buyers’ market fueling inflation.

On the other hand, those trying to save money may benefit from higher interest rates as opening certificates of deposit or savings accounts will garner higher interest on those funds.

When interest rates fall, consumers may want to take advantage and refinance mortgages, student loans or car loans.

Other potential options for taking advantage of lower-interest rates include buying a home or car, paying off high-interest credit card balances and investing in things that help hedge against inflation.

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