What Happens When the Fed Cuts Interest Rates?

News about Federal Reserve rate cuts can seem urgent and make you feel like you need to act fast or risk missing out. The reality is, Fed rate changes affect your money differently depending on what you’re trying to do. For instance, a rate cut might influence broader financial markets, which can affect mortgage rates and potentially lower your monthly mortgage payment while also reducing how much money your savings account earns.

Understanding how rate cuts work helps you see how a rate change could affect your financial options. Whether you’re eyeing a new car, tackling credit card debt, refinancing your mortgage, using your home equity or building your emergency fund, this guide can help you decide when to take action or when to wait.

Here’s what we’ll cover:

• What’s the role of the Federal Reserve? 
• What’s the federal funds rate and why does it change?
• What do rate cuts mean for your personal finances?
• What do rate cuts mean for the economy?
• Interest rates are only one piece of your financial picture
• Smart money moves to make during rate changes
• Frequently asked questions about Fed rates
• Make rate changes work for you

What’s the role of the Federal Reserve?

The Federal Reserve—known as “the Fed”—is the central bank of the United States. Think of it as the bank that oversees all other US banks. The Fed has several important jobs, but one of its biggest responsibilities is managing the country’s monetary policy.

The Fed balances 2 main goals: keeping prices stable so your money holds its value, and keeping unemployment low so people can find jobs. To do this, the Fed raises or lowers the “federal funds rate” to influence how much money people and businesses spend, borrow and invest.

What’s the federal funds rate and why does it change?

When you hear that “the Fed cut rates,” it’s referring to the federal funds rate, which is the foundation for most other interest rates in the economy. Banks use this rate as a starting point when they set rates for car loans, credit cards, savings accounts, etc.

The Fed changes this rate based on what’s happening in the economy:

• The Fed raises rates when the economy grows too quickly. Without a rate increase, inflation can spike and prices rise faster than wages. Borrowing becomes more expensive, which cools off spending and hiring to help slow down the economy.
• The Fed cuts rates when the economy slows down or unemployment rises. Lower rates can boost economic activity and job creation. Borrowing money becomes cheaper, which encourages people and businesses to spend and invest. 

“Adjusting interest rates is the Federal Reserve’s main tool to pump up the economy or slow it down,” says Heather Long , chief economist at Navy Federal Credit Union. “The ideal is for the Fed to be sitting at the ‘Goldilocks’ interest rate that neither stimulates nor constricts the economy, but there’s rarely a calm, even-keeled moment of perfection. More often, the Fed is actively trying to juice the economy or rein it in.”

Long says the Fed members are looking at a lot of economic and financial data on a daily basis. “There are 7 Fed governors who sit in Washington, DC to monitor conditions and 12 regional Fed bank presidents who are located all around the country,” she says. “The regional Fed presidents actively talk to and survey businesses, workers, community leaders and educators about conditions on ‘Main Street’ in their part of the United States. Those anecdotal reports become the ‘Beige Book’ that the Fed releases several times a year. That information is used alongside data on unemployment, inflation, economic growth and consumption.”

Federal Reserve board leaders meet regularly to review all this economic data to decide what they should do—raise rates, cut rates or leave rates alone—to help make sure that inflation and unemployment will be as low as possible.

What do rate cuts mean for your personal finances?

Rate cuts affect different parts of your financial life in different ways and at different speeds. “Americans typically might see lower rates for certain mortgages and car loans quickly,” Long says. While mortgage rates aren’t directly correlated with rate cuts, they can trend in a similar direction in certain circumstances. Indirect effects like these can influence rates across the board.

“Sometimes rates even move down just before the Fed meeting because financial markets have already priced in the rate cut,” says Long. “Credit cards have been slower to respond. It can sometimes take up to 1-2 billing cycles.”

Here’s how rate cuts affect the most common financial products and what that means for your money.

Mortgages

Mortgage rates don’t move in lockstep with the federal funds rate, but they may trend in the same direction. The Fed rate influences stock and bond markets, which can in turn lead to shifts in mortgage rates. This indirect relationship makes mortgages unique in their connection to the Fed rate.

If you have a fixed-rate mortgage, your rate stays the same. Depending on your situation, a rate cut might create an opportunity for you to refinance to get a lower monthly payment.

If you have an adjustable-rate mortgage (ARM) and the Fed cuts interest rates, your rate may decrease at your next adjustment period. 

 

 

If you’re thinking about buying a home or refinancing your mortgage, Long recommends talking with your lender and getting your paperwork and preapproval letter ready in case there’s high demand when rate cuts go into effect.

Auto loans

Auto loan rates typically follow the federal funds rate more closely than mortgages do. When the Fed cuts rates, you might see lower rates on new car loans within a few weeks.

If you already have a car loan, your rate won’t change because it’s fixed for the life of the loan. But if rates drop significantly, you could refinance your auto loan to get a lower rate and reduce your monthly payment.

Credit cards

Most credit cards have variable annual percentage rates (APRs) tied to the “prime rate,” which moves with the federal funds rate. When interest rates fall, credit card issuers usually lower their APRs within 1-2 billing cycles.

If you’re carrying a balance, a rate cut means you’ll pay less in interest charges each month. This can help you pay down your debt faster since more of your payment will go toward the principal.

Savings accounts and certificates

When the Fed cuts rates, the interest you earn on savings accounts, share certificates and certificates of deposit (CDs) typically goes down. Banks and credit unions lower the rates they pay to savers because their own borrowing costs have dropped. If you have money in a high-yield savings account (HYSA), you’ll likely see your rate drop quickly. 

For share certificates and CDs, your rate is locked in for the amount of time, or term, you selected. After a Fed rate cut, new certificates will offer lower interest rates, so locking in a higher rate before a cut happens can help you earn more money on your investment.

“Savers don’t like rate cuts because it means they get less interest in their savings account,” Long says. “I’ve been encouraging members to lock in certificates now to keep the highest rate for as long as possible on savings.”

Retirement accounts

Fed rate cuts can affect your retirement accounts in different ways depending on how your money is invested. Rate cuts can boost the value of bonds and bond funds in the short term. Stock investments may benefit from rate cuts because lower borrowing costs can help companies grow and increase profits. “Investors love rate cuts because stocks usually rise when the Fed lowers rates,” Long says.

Retirement investing is a long-term strategy. Consistently contributing to your retirement accounts and diversifying your portfolio are more important than short-term rate changes.

What happens to the economy when the Fed cuts rates?

Rate cuts affect more than your own personal finances. They also shape the broader economy in ways that can eventually affect your daily life.

“Normally, a rate cut signals the Fed is worried about the economy softening,” Long says. Lowering rates back toward the “Goldilocks level” can help the economy keep growing and encourage businesses to keep hiring.

Inflation

The Fed uses rate cuts to stimulate economic activity, but sometimes this can push inflation higher. When borrowing is cheap, people and businesses tend to spend more money. Increased spending can drive up prices, especially if demand outpaces supply. 

If prices rise too quickly after a rate cut, the Fed may slow down or reverse course to keep inflation under control.

The job market

Lower interest rates can boost hiring. When businesses can borrow money for less, they’re more likely to expand, invest in new projects and hire more workers. This can lead to lower unemployment rates and more job opportunities. 

If the Fed cuts rates because the economy is already slowing, the benefits to the job market may take time to appear. 

Consumer purchasing power

Rate cuts can affect what you can afford to buy. Lower loan rates can make it easier for you to pay for bigger purchases like homes and cars. On the other hand, if rate cuts lead to higher inflation, the prices of everyday goods may rise faster than your income. The Fed aims to keep the economy growing steadily without letting inflation eat away at your purchasing power.

Interest rates are only one piece of your financial picture

Falling interest rates get a lot of attention, but they’re just one factor in your financial decisions. Your personal situation matters more than any single economic indicator.

For example, your credit score can have a bigger impact on your loan rates than Fed policy. Think about it like this: When all other loan factors are identical, 2 people who apply for the same mortgage on the same day can get very different rates based on their credit scores and financial histories. A strong credit score can help you get a better interest rate, which can save you a lot of money over the life of a loan.

Your emergency fund and debt situation also play a big role in how rate cuts affect you. If you have some high-interest credit card debts, a lower credit card rate can help. Paying down that balance aggressively will help even more. And if you don’t have an emergency savings account yet, focus on building that safety net first. That may be more important for your finances than trying to time a mortgage refinance perfectly, depending on your financial goal.

Smart money moves to make during rate changes

Rate changes can create windows of opportunity. When the Fed cuts rates, these strategies can help you make the most of the changing environment.

Consider different mortgage loan options

Take your time to compare different mortgage options and make sure you're getting a good rate on your mortgage. “Some financial institutions will lower rates more than others, and many—including Navy Federal—will match^{Footnote [2]} a low rate from a competitor,” Long says.

Review your refinancing options

Compare your current rate to what’s available now to see if you could lower the monthly payments on your mortgage and auto loan. Refinancing might make sense if you could save a lot of money and you’re planning to keep the loan long enough to offset any closing costs.

Tackle high-interest debt aggressively

Your credit card APR may drop somewhat after a rate cut, but it’ll probably still be high. Use any savings from lower loan payments or increased cash flow to pay down your credit card balances faster. Having less debt means you’ll be better prepared to take advantage of any future rate cut opportunities.

Lock in higher savings rates before they drop

If you’re opening a certificate or high-yield savings account, act quickly before banks lower their rates in response to Fed cuts. Locking in a higher rate now means your money can keep earning more even after rates fall.

Move up major purchases

If you've been planning to buy a home, a Fed rate cut could open the door to earlier opportunity. Rate cuts may make borrowing more affordable. Just make sure you’re financially ready and not rushing into a purchase only because of lower interest rates.

Look into alternative lending options

Think outside the box to find loan options that benefit from rate adjustments. For example, Long encourages homeowners to explore using a home equity line of credit (HELOC) to pay for a renovation or to consolidate debt. “HELOC rates are also moving lower as the Fed cuts rates,” she says. “We’ve seen a lot of members taking HELOC loans at very good rates that are much cheaper than using a credit card or taking on another type of personal loan.”

Reassess your investment strategy

Rate cuts can affect bond values and stock market performance. Talk with a financial advisor^{Footnote [3]} about whether your portfolio allocation still matches your investing goals and risk tolerance in a lower-rate environment.

Fed interest rate FAQs

What’s a “target rate”?

The “target rate” is the Fed’s goal for the federal funds rate. The Fed sets a target range—usually a quarter percentage point wide—rather than an exact number. Banks then negotiate rates within that range when they lend to each other overnight. When you hear “the Fed cut rates by 0.25%,” that means they lowered their target range by that amount.

How often does the Fed change interest rates?

The Federal Reserve’s policy-making committee meets 8 times per year, roughly every 6 weeks. They review economic data at each meeting and decide whether to raise rates, lower rates or keep them the same. The Fed doesn’t change rates at every meeting. Sometimes they hold steady for months, or even years, depending on economic conditions.

Do rate cuts indicate that a recession is coming?

Not necessarily. The Fed cuts rates for different reasons. Sometimes they cut rates to prevent a recession by boosting economic activity before things slow down too much. Other times they cut rates because the economy is already weakening. Rate cuts are a tool to manage the economy, not a prediction of where the economy is headed.

What does it mean if the Fed doesn’t cut rates?

When the Fed holds rates steady, it usually means they think the economy is in a good place. Inflation might be under control, unemployment might be low and economic growth might be steady. 

What does it mean when the Fed raises rates?

Rate increases are the opposite of rate cuts. The Fed raises rates when the economy is growing too quickly and inflation is rising too fast. When interest rates rise, it makes borrowing more expensive, which typically slows spending and hiring. A rate increase helps cool down the economy and keep prices from rising out of control. For the average consumer, rate increases mean higher costs on loans and credit cards, but potentially better returns on savings accounts.

Make interest rate changes work for you

Navy Federal Credit Union offers tools and resources to help you navigate changing interest rates. Use our mortgage payment calculator to see how different mortgage rates could affect your monthly payment. Check out our car loan calculator to explore financing options and browse our current rates to see what’s available now. You can also run your numbers to see if refinancing your current mortgage or auto loan would be a good move. Also, check out our competitive credit card offers, savings accounts and share certificates.

As the market shifts, see how Navy Federal Investment Services can support your investing strategy. Members can connect with knowledgeable financial advisors for personalized guidance or use Digital Investor, our do-it-yourself online platform, to research, buy and track investments—all in one place.

If you want to strengthen your overall financial picture, find out more about building an emergency fund, improving your credit score and other longer-term strategies. Our MakingCents financial education resources can help you make confident decisions, no matter what the Fed does next.