How the Fed's Next Rate Move Could Impact Your Wallet

Throughout 2025, the Federal Reserve has kept interest rates steady after cutting them by a full percentage point in 2024. But signs are emerging that change may be on the horizon.

Inflation appears to be cooling, the job market is showing signs of softening, and at the August Jackson Hole, Wyoming, conference, Fed Chair Jerome Powell indicated that rate cuts could be on the table in upcoming meetings.

So why does this matter?

The Fed's goal is to keep the economy balanced — not too hot, not too cold. Think of it like Goldilocks' porridge: just right. The key tool it uses is the fed funds rate, which influences how much banks charge each other for overnight loans.

This rate affects a wide range of borrowing costs, from credit cards to mortgages, but it primarily targets short-term interest rates.

Longer-term rates, like those on fiveor 10-year loans, are shaped by more than just Fed policy. They reflect expectations about future short-term rates, inflation and market demand.

So, a rate cut doesn't automatically mean lower longterm borrowing costs.

Given that it looks highly likely that the Fed will lower rates in the near future, it's worth considering who would benefit from lower rates, who is hurt by them, and what to do if rates are going down.

Who benefits from lower rates?

Theoretically, anyone who is looking to borrow money benefits from lower rates, but due to the nature of the yield curve (the interest rate for different lengths of borrowing), not all borrowers benefit equally.

The type of debt that is most directly affected is variable rate debt with rapid resets. Things that tend to fall into this category are home equity lines of credit (HELOCs) and credit cards on the consumer side and floating-rate loans the corporate side.

Adjustable-rate mortgages also benefit from lower rates, but after the financial crisis, their use plummeted and are fairly uncommon today.

While it is always nice to get a break when a 27.5% credit card interest rate moves to a 26.5% rate, assuming the Fed eventually implements a cut of 1 percentage point, that probably won't help many people.

Arguably, the same is true for things like home equity lines, which tend to carry higher interest than mortgages.

More affordable housing via lower rates is often cited as a reason rates need to be cut now, and home sales are at a nadir in this high-rate environment.

There are a few issues with this argument, however. Most people finance their homes with 30-year mortgages, which are more closely tied to the 10-year Treasury rate, not the fed funds rate.

As markets expected higher inflation in the future, longer-term rates actually rose last year despite Fed cuts. That same phenomenon is happening now.