What it means for your bank accounts, loans, credit cards and investments

On Thursday, the Federal Reserve cut short-term interest rates again by a quarter point.

With the election over, stock prices soaring and interest rates falling, the capital markets are bubbling with exuberant optimism.

With inflation at 2.4% in September – just fractions of the 2% target – Fed officials decided to cut interest rates by another 0.25%. The challenge remains: to soften the economy.

There are a lot of moving parts that need to be coordinated.

Read more: Fed forecasts for 2024: What experts say about the possibility of further rate cuts

The Fed controls an interest rate: the federal funds rate, which banks use for short-term loans to each other. The target range for the federal funds rate is currently 4.50-4.75%.

The Fed's interest rate decisions ripple through the financial world, affecting virtually every aspect of borrowing costs and savings rates. Interest rate management is a monetary medicine that the Fed uses to:

• Slow the economy by raising interest rates to curb rising costs (high inflation), as measured by the Consumer Price Index.

• Help drive a recovery as we find ourselves at the other end of an economic cycle by lowering interest rates to pump liquidity into the financial system.

• Allow past actions to take hold while the Fed considers future actions by keeping interest rates stable.

In a press conference on November 7, Fed Chairman Jerome Powell said: “As the economy develops, monetary policy will adjust to best promote our maximum employment and price stability objectives.”

He reiterated that the FOMC makes its decisions session by session and can adjust monetary policy depending on the circumstances.

“If the economy remains strong and inflation does not move sustainably towards 2%, we can reduce policy restraint more slowly. If the labor market unexpectedly weakens or inflation falls faster than expected, we can move more quickly,” Powell said.

Here's how the Fed's new interest rate strategy could affect your loans and accounts.

Your short-term liquidity depends on the money in the bank. As interest rates rose, interest rates on deposit accounts also rose.

Now the cash in the bank will earn less. Smart savers need to look for the best returns as providers start to relax their interest payments.

Checking accounts with interest offer the lowest returns. However, you need quick access to the money, and if you manage your cash flow, the bank won't have the majority of the money in its hands for long.

Interest-bearing checking accounts paid out a national average of 0.07% per month in October 2023. A year later, this rate remained unchanged at 0.07%. This is already slightly less than the 0.08% interest rate paid in September this year.

It is best to park short to medium-term money in a savings account. It's part of your easy-in, easy-out cash strategy. Last year, in October, the average monthly interest rate for a traditional savings account at a brick-and-mortar bank was 0.46%. Last month it was 0.45%.

High-yield savings accounts pay more – Yahoo Finance lists APYs for high-yield savings accounts between 4.00% and 5.25%. You can see that the shopping rates are really worth it. (The effective annual interest rate results from the compounding of your interest rate. The compounding periods may vary depending on the bank.)

A money market account often increases your return over a traditional checking account, but you'll likely need to deposit between $10,000 and $100,000 to get the increase.

Last October, the national average monthly interest rate was 0.65%. A year later it is 0.61%. Consider putting your second layer of cash in a better-than-average money market account. It's the money you want to always have on hand, but not the checking account near you.

To do this, look for a high-yield money market account. As the Federal Reserve continues to cut interest rates, high-yield money market accounts will pay less. Yahoo Finance sees high interest rates ranging from 4.00% to 5.25%.

What to do now: Buy interest rates from banks, both brick-and-mortar and online. Keep your cash flexible in the short term and earn the best interest rate possible.

This new low interest rate cycle will also impact CDs.

A 12-month CD earned 1.79% interest per month in October 2023. A year later, the CD with the same term paid 1.81%. However, these national averages don't always reflect the better interest rates you can find while shopping: The best CDs cost around 4.50% to 4.85% APR for a six-month term. Your minimum deposit and term affect your interest rate.

What to do now: Use CDs to earn interest on your money over the medium term. When interest rates fall, longer-term CDs may be your best option while you use other readily available solutions for your short-term savings.

Now to the other side of the active-passive ledger. This is where lower interest rates can be beneficial to you.

According to the latest available data, personal loan interest rates rose from 8.73% at the start of the Fed's rate hikes in 2022 to 12.33% in August 2024. Now that the Fed is cutting interest rates, we can expect these rates to slowly decline.

Most federal loans have fixed interest rates, so Fed policy has no impact on them. Private student loans can have a variable interest rate, and Fed rate hikes can be a factor.

To find out the interest rate on an existing loan, contact your lender or loan servicer.

If you've tried to buy a home in the last two years, you know this story: Home loan interest rates have skyrocketed. When the Fed's rate hikes began, lenders were charging 30-year fixed-rate mortgages at around 4%, according to Freddie Mac.

They rose to nearly 8% last fall, but 30-year fixed-rate mortgage rates fell below 7% last December. With the exception of a spike above 7% in May, mortgage rates have remained in the 6% range.

It has taken nearly 20 years for mortgage rates to fall from 7% in 2001 to an annual rate of under 3% in 2020. And homebuyers may not be quick to notice that lenders are setting mortgage rates so low again. The 50-year average for a 30-year fixed-rate mortgage is still well over 7%.

What to do now: As borrowing costs slowly fall, resist the urge to take on more debt or extend the term of existing loans. Monitor upcoming mortgage refinance opportunities.

Read more: How the Fed's interest rate decision affects mortgage rates