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The Fed Rate Announcement: What You Need to Know



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Editor’s note: this article has been updated from its original publish date of July 29, to include new information.

In July 2019, The Federal Reserve cut rates for the first time since the financial crisis. Now, it has cut rates again—for the third time this year.

Americans may want to prepare now for some changes to their finances—especially since the cuts happened so close together. This action has the potential to affect savings, credit cards, student loans, mortgages, and investment portfolios.

Curious about how the process of cutting and hiking rates works? Wondering how the rate announcement by the Federal Reserve may affect you? Read on for a high-level overview of information that may be helpful as you plan for the near future and beyond.

How and Why the Federal Reserve Changes Rates


When we talk about the Fed changing interest rates, we’re actually talking about change to one rate specifically—the federal funds rate, which is the interest rate at which banks lend their reserve balances to each other overnight. The federal funds rate can influence other interest rates such as those on mortgages, loans, and savings accounts.

What causes the Fed to change the federal funds rate, then? Generally speaking, the Fed is trying to optimize the American economy for certain policy outcomes like full employment and low inflation, and the federal funds rate is an economic tool they can use to influence these outcomes.

Although a simplification of the process, the Fed tends to increase the fed funds rate during times of economic boom, in an attempt to keep inflation at bay and reduce speculative investing on borrowed money. The Fed may lower rates during difficult economic times in an effort to ease up credit and encourage spending.

Essentially, lowered interest rates make it cheaper to borrow money and less lucrative to hold it.

Before the first rate cut of 2019 in July, the U.S. was over ten years into a period of general economic growth during which the Fed increased the rate in tandem with that growth. This usually happens bit by bit over the course of years. The Fed increased the federal funds target rate by 0.25% four times in 2018 , and three times in 2017.

By cutting rates in the coming days, the Fed would be encouraging more economic activity to try and prolong a period of economic growth.

How Could the Rate Cut Affect Me?


A rate cut could result in a mixed bag for savers, investors, and borrowers. Off the top, there’s a definitive connection to be found—lower interest rates on loans can also mean lower rates for savers.

Here are a few possibilities:

1. Bank Deposit Interest Rates May Decrease


If you are currently saving in a high-interest savings account, you may see annual percentage yields (APYs) adjusted to reflect the change in the fed rate. Same goes for other interest-bearing investments and cash equivalents, such as money market funds or bank Certificates of Deposit (CDs).

According to Bankrate, some banks with high-yield savings accounts lowered their yields in June in advance of the Fed’s first anticipated rate announcement. This may frustrate some savers, who have been getting increasingly more bang for their buck over the last several years.

What might this mean for you?

Lower interest rates shouldn’t dissuade you from saving money; you should still keep your goals in mind.

2. Credit Card Rates May Decrease


The variable interest rates on credit cards are typically tied to the prime rate . If the prime rate changes, so may the interest rate on many credit cards.

Though the Fed does not necessarily have control over the prime rate, the federal funds rate acts as its base. When the Fed lowers the federal funds rate, the prime rate typically falls with it. When the Fed raises its benchmark rate, the prime rate typically goes up accordingly.

It is possible that credit card rates may fall across the board. While this may offer some reprieve for borrowers with high balances, a potentially small rate change may not make much difference for many credit cardholders. Unfortunately, a small percentage is hardly momentous considering the already-high rates on most credit cards.

What might this mean for you?

While you may get a small break on your credit card interest, it’s no reason to let up on your plans to pay back your debt. If your goal is ultimately to grow your wealth, minimizing or eliminating your high-interest debt is an important step. It’s hard work, but it will feel so good. Consider organizing your debt, things like credit cards, student loans and more, and putting together a plan to get it paid back, taking advantage of potential lower rates and greater savings in the process.

3. The Future of Mortgage Rates Remains Uncertain


The Fed doesn’t have direct control over mortgage rates, so it’s harder to say what will happen here. Generally, both the fed funds rate and mortgage rates are influenced by similar market forces, and over time, tend to move in tandem.

In fact, the fed funds rate may be catching up to 30-year fixed-rate mortgages, which have fallen over the last year. On top of that, 30-year fixed mortgage rates haven’t been this low since 2016 .

“The 30-year fixed mortgage rate has fallen more than a full percentage point from last year,” says McBride, CFA, Bankrate chief financial analyst. “While not directly related to a Fed cut, the two are sort of a reflection of the same concern: The expectation that the economy is going to slow.”

What might this mean for you?

Since buying a home is typically such a large expenditure, even a small percentage change in interest rates can make a difference. And, that’s certainly something to consider—this window of lower rates can potentially lead to substantial savings for homeowners or those in the market for one.

If you have a variable-rate mortgage, you may see a decrease in your monthly payments—if mortgage rates follow the Fed funds rate. If you have a fixed-rate mortgage, this may be a good time to consider refinancing your home loan to reduce your interest payments.

4. It’s Hard to Predict the Impact on the Stock Market


Predicting short-term moves in the stock market is a fool’s errand. Prognosticators disagree about whether a rate change will move stocks up or down in the near term, ranging from wildly positive to unhopeful and dour.

Generally, easier access to capital and lower debt servicing costs is a good thing for business, and so it is possible we see a bump in stock prices. But, a rate cut could also be perceived as a signal that the economy is weakening. And, the stock market could very well react negatively.

Another outcome is that the stock market doesn’t react much at all.

What might this mean for you?

This news may be more interesting to short-term traders than long-term investors. Generally speaking, if you are investing in the stock market for long-term goals such as retirement, you shouldn’t be swayed by short-term moves in the market.

After all, “It’s time in the market, not timing the market,” proclaims one famous investing adage.


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