How Lower Interest Rates Affect Your Finances (and the Economy)

In November, the Federal Reserve Board cut interest rates for a second time in 2024. The September rate cut was the first in more than four years.

According to the Federal Reserve’s economic projections, the Board anticipates additional interest rate cuts in 2025. This is a reversal of recent policy, as the Fed has been raising interest rates aggressively since 2021 in efforts to combat rising inflation. Thankfully, inflation has slowed from a peak of around 9% in 2022 to 2.4% in September 2024.

The Federal Reserve Board (also known as the Fed) uses interest rate adjustments as one tool to maintain a healthy economy.

High interest rates often reduce demand for loans by making it more expensive to borrow money. That can often lead to rising unemployment as businesses are forced to reduce output and cut jobs.

The goal of the Federal Reserve – as specified by Congress – is to maintain maximum employment and stable prices in the United States. Typically, that means an inflation rate of 2% over the long run and the highest level of employment the economy can sustain over time without leading to excessive inflation.

But as you’ve likely heard or felt, dropping interest rates can impact your personal finances in addition to larger economic trends.

Here’s what you can expect in various areas of your money.

If you have money in a savings account or plan to open a new Certificate of Deposit (CD), the rate of interest you earn may be lower after Fed rate cut. Interest rates can even drop in anticipation of a Fed rate change. But that doesn’t mean you should stop saving or move your money. Most existing CDs you have will continue earning the rate you locked in until they reach maturity. And you can still earn healthy returns in a competitive high-yield savings account like Growth Savings¹, with no minimum balance, no fees, and daily compounding interest, compared to traditional savings accounts

A lower federal funds rate usually results in lower interest rates for borrowers. That means the interest rate on your credit cards might drop, or you may be able to get a new loan or refinance an existing loan at a lower rate. If you have a credit card balance and your interest rate drops, consider using the money you’re saving on interest to pay off your balance. After paying off debt, you’ll have more money available to save for your future.

If you’re thinking about purchasing a home, a lower interest rate environment means you may be able to get a mortgage with a lower rate. If you already own a home with a higher interest rate, you may be able to save money by refinancing your mortgage at a new, lower rate.

Lower interest rates make it cheaper for consumers and businesses to borrow money. If you’ve been waiting to make a large purchase such as a car or a new appliance, a lower interest rate environment can help you save on interest if you’re financing the purchase.

As interest rates drop, it may be wise to resist the temptation to spend more or borrow more. Instead, stay committed to your savings goals and focus on your long-term financial health. Interest rates will inevitably rise and fall, but by maintaining your commitment to savings with recurring deposits and other long-term habits, you can make progress toward your financial goals regardless of the economic environment.

¹Growth Savings annual percentage yield (APY) may change at any time, as communicated in account disclosures.
Disclaimer: This article is for general information and education only. It should not be considered financial or tax advice.