Federal Reserve cuts interest rates: Here's how it will affect you as a consumer

The Federal Reserve has reduced its benchmark interest rate from its highest level in 23 years. On Wednesday, the Fed announced a half-percentage point cut, bringing the rate down to a range between 4.75% and 5%. This marks the first rate reduction in over four years.

The central bank decided to lower rates after raising them 11 times since March 2022. The Fed believes inflation has decreased enough to start lowering borrowing costs. At the same time, it expressed concerns about the job market. Lowering rates is intended to support hiring and keep unemployment low.

“Recent indicators suggest that economic activity has continued to expand at a solid pace," the Fed stated. “Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress."

More rate cuts are expected in the coming months, depending on inflation and job growth trends. Fed Chair Jerome Powell said, “We know that it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation.”

For savers, lower rates may result in decreased yields. Christine Benz of Morningstar advised shifting money into high-yield savings accounts or longer-term certificates of deposit to preserve capital. “An easy short-term move to protect your savings is to shift your funds into a high-yield savings account,” advised Matt Brannon of MarketWatch.

For borrowers, lower rates could lead to better terms. Matt Schulz of LendingTree noted that consolidating debts with balance transfer credit cards or low-interest personal loans might provide greater relief.

Mortgage rates are indirectly influenced by the Fed’s rate, often moving in the same direction. LendingTree's Jacob Channel said mortgage rates might need to fall further before many homeowners consider refinancing.

Auto loan rates might also decline, benefiting borrowers with strong credit profiles. Greg McBride of Bankrate emphasized the importance of shopping around for the best rates.

The impact on inflation and the job market will be crucial in determining future rate cuts. In August, consumer prices rose by 2.5%, and employers added 142,000 jobs, leading to a slight decrease in the unemployment rate to 4.2%.

The Fed will continue to monitor these indicators to guide future rate decisions.