The Federal Reserve just lowered interest rates for the second time this year. The first cut, in July, which was the first in a decade, came as worries developed about the strength of the economy.
This cut, like the preceding one, is small — only 25 basis points, or a quarter of a percentage point. But it's significant: Rates have now dropped half a percentage point since July.
Falling rates are a double-edged sword for consumers. You'll earn less on your savings. But if you have debt, a rate cut can make it cheaper to borrow and enable you to zero out balances more quickly. Experts suggest you use the situation to your advantage if you can. "The smart thing to do is to look at all of your obligations and try to figure out if there's an opportunity to get a better rate," says Tendayi Kapfidze, chief economist at LendingTree.
Here are a few smart money moves experts suggest you make after a rate cut.
Consider any change in interest rates a nudge to make sure you're getting a great deal on your savings account balances.
Greg McBride, chief financial analyst at Bankrate, told Grow earlier this year that the slow rise of rates over the past several years has helped people with money in the bank earn pretty good returns over that time, so "one or two rate cuts isn't going to change" that reality: "Savers are far ahead of where they were a few years ago."
Some banks have already lowered interest rates slightly on their online savings accounts, and more are likely to follow now. Even so, some high-yield accounts are offering rates as high as 2.02%, well above the national average of 0.28%, according to DepositAccounts.com.
If you haven't considered moving your emergency fund to an online bank, which tend to have higher interest rates, now may be a good time.
If you have savings other than your emergency fund that you don't anticipate needing in the short term, look at other options that can offer you higher rates, Justin Halverson, a financial advisor at Great Waters Financial in Minnesota, told Grow earlier this year. Those might include a certificate of deposit, a bond fund, or even a high-rate savings account that requires a minimum balance in the thousands of dollars.
Banks agree to give depositors higher interest rates on high balances in exchange for parting with more of your money, meaning that you end up earning more interest when you have more cash in the bank. So, the higher the rate you lock in, the more you stand to earn in interest.
Falling interest rates can mean you're paying less in interest on debts that have variable rates tied to or influenced by the federal funds rate. Those can include credit cards, some mortgages, and private student loans, for example.
So any extra cash you can save and then put toward those debts can add momentum — more of your money goes to paying down the balance, and you can end up debt-free a lot faster.
The Fed is tasked with keeping our economy healthy. It does that, in part, by setting a benchmark interest rate called the federal funds rate, which influences the rates banks charge you on credit cards, mortgages, and other loans, and what kind of interest they offer on products like savings accounts and certificates of deposit.
For consumers, this is what generally happens when rates are cut:
- It becomes cheaper to borrow money, as consumers will pay less in interest.
- Those with money in savings will earn a little less in interest.
- The value of your investments may go up as even the hint of a rate cut tends to lead to a surge in stock prices. Markets actually dropped a bit Wednesday, though, as they did after the previous rate cut in July. Experts say that is because Federal Reserve Chair Jerome Powell has yet to commit to further cuts in the future, instead opting for a wait-and-see approach.
Overall, rate cuts have pros and cons for ordinary consumers. Lower rates create incentives for people to borrow and spend money, rather than save or invest it.
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