🚨 The Fed just cut rates — here's what that means for you

Hi! Money editor Julia Glum here with a breaking news update: Minutes ago, the Federal Reserve announced that it’s slashing interest rates by 0.5 percentage points in its first rate cut since 2020.

By decreasing the target range for the federal funds rate, or the rate at which banks lend each other money overnight, to 4.75-5.0%, the Fed is setting off a chain reaction that will indirectly influence several parts of the U.S. economy — including your wallet. So our team of reporters has put together a quick FAQ on all things Fed.

Here's what you need to know about today's news.

Wait, what just happened?

The Fed did what everyone expected: It cut interest rates.

This is a big deal because over the past few years, the Fed ratcheted up interest rates (and then held them steady) in order to curb excessive post-pandemic inflation. But now, price increases have largely normalized. Inflation is at 2.5%, which is pretty close to the central bank's 2% long-run target.

Though experts say it’ll likely take a while for everyday Americans to feel the full effects of the Fed’s decision, the central bank’s rate cuts will have far-reaching consequences, especially if they continue as expected throughout the rest of 2024 (and maybe into 2025).

By decreasing rates, the Fed is making borrowing money less expensive, broadly making loans cheaper and saving less desirable. 

Does this mean mortgage rates will finally come down?

Changes in the federal funds rate don’t directly affect mortgage rates, but there is a trickle-down effect. In fact, it's already begun: Because this reduction in rates was so widely anticipated, many lenders have already priced it into their loan offerings. Mortgage rates have dropped by more than half a percentage point over the past six weeks.

While housing experts expect mortgage rates to continue to move lower, the decline will likely be gradual and extend through the rest of the year (and into 2025). But there could be some bumps along the way.

Will the rate cut affect my savings?

While high interest rates have been a pain in many areas of people’s finances, they’ve been a boon for savers. That’s because when benchmark interest rates are high, so are the annual percentage yields (APYs) on deposit accounts like money market accounts, high-yield savings accounts and certificates of deposit (CDs).

With money market and high-yield savings accounts, banks can change the APY whenever they want on the money that’s already deposited in the account. The rates on these accounts are typically quickest to change when the Fed makes adjustments and are effective immediately. 

How will the stock market react?

The market could be looking at a watershed moment, the likes of which haven’t been seen since 1995. That year, when Alan Greenspan’s Fed slashed rates, the S&P 500 gained over 34% after posting a record 77 all-time highs.

For those whose investment horizons permit for market volatility, it’s once again time to consider higher-risk assets like stocks and ETFs. From March 2022 to July 2023, the Fed’s rate-hiking policy made low-risk assets — like bonds, Treasury bills, CDs and other cash alternatives — nearly as appealing as the equities market. Now, safe-haven assets and high-yield savings products where investors have been stashing cash will begin to lose their appeal.

Investors who overlook this opportunity and fail to deploy their cash positions could find themselves on the sidelines as the stock market potentially posts a historic finish to an already strong year. 

Are more rate cuts coming?

Nobody knows exactly what's happening inside Fed Chairman Jerome Powell's brain, but probably. Goldman Sachs, Morgan Stanley and Deutsche Bank are among the big brokerages predicting two more 0.25-percentage-point rate cuts before the year's end. As of this morning, the CME FedWatch tool showed a 39% probability that 2024 would finish with a target range of 4-4.25%. 

The next FOMC meeting is set for Nov. 6-7, and the final one for 2024 is Dec. 17-18. 

Does Money have any more analysis I can read?

So glad you asked! Yes. You can check out a few of our recent Fed pieces here.