How does the Fed rate cut in September 2024 affect your money?

Policymakers at the Federal Reserve in order to battle high inflation began a series of interest rates in March 2022, which peaked over 9 percent a few months later. Over the following year and a half, the Federal Open Market Committee (FOMC) raised interest rates 11 times to a level not seen in two decades.

They have remained at the 5.25%-5.50% range since July 2023 as policymakers waited to see inflation return to their target rate of 2 percent. While prices are still rising higher than that, they appear to be approaching the desired level. This has allowed for the first rate cut in over four years as worries about the labor market cooling are now of more concern.

How does the Fed rate cut in September 2024 affect your money?

The FOMC agreed on a reduction of 50-basis points to the federal fund rate “in light of the progress on inflation and the balance of risks.” While the markets had already priced in a rate cut of a quarter percentage point, traders in recent days had increased their expectations that policymakers would go bigger according to the CME Group’s FedWatch tool.

This is just the first of a series of reductions that are expected. On the whole, the move is good news for consumers and businesses who will be able to spend more freely but less so for savers.

Consumers and businesses will begin to feel the impact of the decision in lower borrowing costs. This will mean those who are looking to buy a new car or people carrying balances on their credit cards will see relief from high rates.

Mortgage rates have already been falling as the Fed had previously signaled that it was time for cuts to begin. Despite more rate cuts expected before the end of the year and into 2025, sub-4% mortgage rates aren’t expected to return in the foreseeable future.

On the other hand, those who have been enjoying higher returns from their savings will be on the losing end as banks lower the rates on high-yield savings accounts. Something that they already began doing prior to the Fed’s watershed move.

How the stock market reacts is another matter. Policymakers have been trying to nail a soft landing for the economy even as they were tightening borrowing conditions to slow the runaway price increases. If investors see this rate cut as a sign that the Fed is behind the curve, something they were accused of when they began to rapidly raise rates over two years ago, concerns could mount that the economy could crash.

Albeit, lower interest rates tend to boost the stock market in general as it is cheaper for investors to take on risk compared to the yields they get from government bonds which are safer asset. All three major indexes are well above where they were at the start of the year, hitting multiple record highs this year.