Fed Cuts Interest Rates for First Time in Four Years

On Wednesday, the Federal Reserve took a significant step by announcing its first interest rate cut in four years. This move, which was widely anticipated, is set to influence the financial landscape for Americans in a variety of ways. The Federal Reserve’s decision to lower rates aims to make borrowing cheaper, but it also signals the end of an era for high-yield savings options.

The Fed’s policy-setting committee decided to reduce the federal funds rate by 50 basis points. This more substantial cut comes amid a split in expectations, with some anticipating a 25 basis-point cut while others forecasted a 50 basis-point reduction. This adjustment is the first cut since March 2020, decreasing the rate from the previous range of 5.25% to 5.5%, which had been in place since July 2023, marking the highest rates since 2001. The reduction follows a period of moderating inflation, which had initially driven rates higher. With inflation easing, the Fed’s decision reflects a pivot aimed at supporting economic growth while maintaining stability.

The Federal Reserve’s influence extends beyond just the federal funds rate, affecting borrowing costs across the economy. Mortgage rates, which are closely linked to government bond yields and the Fed’s monetary policy, are expected to decline following the rate cut. Last week, 30-year fixed mortgage rates hit a 19-month low of 6.2% as anticipation of the rate cut drove rates down. With the Fed’s recent decision, mortgage rates are likely to continue decreasing, making home buying and refinancing more affordable. Car loans, which have reached their highest levels since 2001, are set to become cheaper. The average rate for new car loans has climbed to around 8.7% from under 5% in 2021. As the Fed cuts rates, the cost of auto loans and other consumer debts, such as variable-rate private student loans and credit card interest, should decrease, providing relief for borrowers.

Lower interest rates generally translate to more accessible credit for businesses. This can encourage companies to expand and hire more employees, potentially boosting job growth as firms take advantage of cheaper borrowing costs. While the rate cut benefits borrowers, it poses a downside for savers. High-yield savings accounts, certificates of deposit, and money market funds, which have offered attractive returns over the past two years, are likely to see reduced yields. These savings vehicles are closely tied to the federal funds rate, meaning their interest rates will fall as the Fed cuts rates.

Historically, rate cuts have been favorable for the stock market. As investors shift funds from lower-yielding government bonds and money market funds to seek higher returns, stocks often benefit. According to Charles Schwab, the S&P 500 stock index has risen 86% of the time in the 12 months following the first rate cut in a cycle dating back to 1929. During a press conference, Fed Chairman Jerome Powell characterized the current economic conditions as “good” and described the rate cut as a measure to maintain “solid” growth, declining inflation, and a steady labor market. Powell indicated that this is part of a “cutting cycle,” suggesting that further rate cuts are likely. The Fed’s quarterly projections released on Wednesday forecast additional cuts of 50 basis points this year and 100 basis points in 2025, aiming to bring the target range down to 4.25% to 4.5% and 3% to 3.25%, respectively.

Despite the recent rate cut, the U.S. is unlikely to return to the extremely low-rate environment seen in the past. The Fed’s long-term forecast for the federal funds rate is 2.9%, which is higher than the near-zero rates experienced from December 2008 to December 2015 and March 2020 to March 2022. This indicates that while rates are set to decrease, they will remain above the historically low levels that characterized the last decade. In summary, the Fed’s decision to cut interest rates marks a pivotal shift in monetary policy, with broad implications for borrowing costs, savings yields, and economic growth. While the immediate effects will make borrowing cheaper and potentially boost the stock market, savers should prepare for reduced returns on high-yield accounts. The Fed’s ongoing adjustments will be closely watched as they continue to navigate the economic landscape.