The Federal Reserve announced its first rate cut in four years on Sept. 18. It opted for a more aggressive 50 basis point cut instead of just 25 basis points, but many see this as just the beginning.
Now that inflation is slowing, we’re entering a cycle where we’ll likely see several rate cuts over the next year. There’s also a good chance we see one more cut in 2024. Here’s when it’s likely to happen and how it could affect your savings accounts, loans, and more.
When’s the next Fed rate cut coming?
The Federal Reserve dropped the federal funds rate (the rate banks lend to each other) sharply during the COVID-19 pandemic when lockdowns happened and people were struggling financially. Then, as inflation got out of hand, it raised it 11 times until it reached the 5.25% to 5.50% range.
This didn’t directly change anything for consumers. But since banks typically use the federal funds rate as a guide in setting their own rates, we saw borrowing become more expensive during this time. Plus, interest rates rose on savings accounts and certificates of deposit (CDs).
Now that inflation has cooled again, we’re heading back into a rate cutting cycle. There’s no telling exactly how much rates will drop or how often. The Fed plans to monitor the situation over time and wants to return inflation to its 2% target.
Its latest statement said nothing about future rate cuts, but many expect there will be at least one more this year. And with only two more Federal Reserve meetings planned for 2024, we can get a pretty good approximation of when the next one will be.
The final two meetings are slated for Nov. 6-7, 2024 and Dec. 17-18, 2024. Rate cuts are always announced on the final day, so it’s possible we could have another one as soon as Nov. 7. If it doesn’t happen then, Dec. 18 is probably a good bet.
But even this is likely just a warm-up for 2025, when most experts expect we’ll see several more rate cuts. We’ll have to wait and see when these will occur, but we have a pretty good idea of how they will affect our finances.
How will future rate cuts affect you?
Federal Reserve rate cuts tend to have two key results: They make borrowing money less expensive and they reduce the interest earned on bank account funds.
The lowering of savings account and CD rates is disappointing after years of earning close to 5.00% APY. But the loss probably isn’t that significant for most people. It’ll mean slightly smaller interest payments each month. But for most people, it’ll come out to a couple hundred dollars less per year, tops.
It’s likely to have a much larger positive effect for those who have borrowed money or who are looking to do so in the near future. Loans of all kinds will become more affordable as annual percentage rates (APRs) decline. Credit card APRs may come down, as well. Of course, the exact decrease you’ll experience depends on your lender and credit history.
With more rate cuts planned, 2025 could be a good time for refinancing mortgages, particularly if you took yours out when rates were at their peak. But you have to remember that you’ll pay closing costs again, so that might offset some of the gain you get from reducing your interest rate.
It’s worth noting that drops to the federal funds rate may not correspond exactly to the decreases you see on your loans or credit cards. Every bank sets their own rates. The federal funds rate is only intended to be a guide. Keep an eye on any account statements you have for details of rate decreases or reach out to your bank or lender for the latest information.
