KEY TAKEAWAYS
- The Federal Reserve cut its influential federal funds rate on Wednesday, making it a percentage point lower than at the beginning of the year.
- However, Fed officials predict they will likely cut less aggressively in 2025. Some economists expect the Fed to hold rates at the first policy meeting of the new year in January.
- Financial advisers say it is important to be aware of your interest rates on borrowing and saving accounts, not make any moves based on a prediction, and diversify your investments and savings during this time.
The Federal Reserve cut its benchmark interest rate on Wednesday, but it could be the last reduction for a while.
Following a meeting of its policy committee, the Fed announced it cut its influential federal funds rate by a quarter point, making it a full percentage point lower than at the start of the year. In addition to cutting the rate, central bankers released their projections for the policy path ahead and, on average, expect they will cut rates much less aggressively in 2025 than previously expected.
The fed funds rate influences interest on all kinds of borrowing costs, including auto loans, credit card interest, and mortgage rates. That means Wednesday’s developments could affect your budget going into the new year. Here’s what financial advisers suggest you do after the Fed’s rate cut.
Be Aware of What Your Bank Is Doing
The federal funds rate is a target range for borrowing costs charged by commercial banks when they lend excess reserves to each other overnight.
After Wednesday’s cut, banks will likely charge each other less to borrow money. Banks will likely, in turn, pass those changes on to customers, resulting in lower loan and savings rates. However, they are not under any obligation to directly follow interest rates or inform their customers about changes in interest rates.
Robert Persichitte, a certified financial planner for Delagify Financial, suggested diligence as a consumer. Banks can change their interest rates at will, and monitoring your interest rates on both your borrowing and savings is key during this time.
“Just because interest rates rise or fall, that doesn’t mean your account is going to move in either direction,” he said.
‘Don’t Think That You 100% Know the Future’
While Fed officials, on average, indicated they foresee only two quarter-point rate cuts in 2025, the economic projections are only a snapshot and could change as the economy shifts.
“We have no guarantee that rates will continue to fall and they could potentially rise,” Persichitte said. “So don’t think that you 100% know the future.”
Economists broadly expect the Fed will hold rates where they are when the policy committee meets in January, meaning they will stay the same until they meet again in mid-March. However, predictions beyond that are likely to be murky.
“If your local sports team is going to win or lose this weekend, you can kind of bet on that and have a little bit of knowledge about it,” Persichitte said. “’Are they going to win the championship this season?’ is a little bit less clear. And then, ‘are they going to win the championship 10 years from now?’ is extremely unclear.”
Diversify Where You Have Your Money
Since you can never be sure of what will happen next, diversifying your investments is best in times of change, said Certified Financial Planner David Demming Sr.
Investing your money in mutual funds or ETFs can provide you with a portfolio of different stocks or bonds that spread risks across multiple investments, he said. For savers, Persichitte suggested locking in a long-term CD or building a bond ladder to boost your returns.
“Show discipline and patience because when people panic is when they shoot themselves in the foot,” Demming said.