Fed cuts interest rate for first time in four years. Here’s what it means for you

In a widely expected move, the U.S. Federal Reserve made a cut to its benchmark federal funds rate on Wednesday, approving a 0.5% reduction and marking the first downward adjustment in four years. The decision follows a protracted effort by the monetary body to cool down an overheated U.S. economy and high inflation wrought by the broad impacts of COVID-19 on the domestic and global economies.
While the reduction was well signaled by Fed Chairman Jerome Powell ahead of the September policy meeting, market watchers were split on whether the step-down would stick to the body’s typical adjustment increment of .25% or a more aggressive 0.5%. While U.S. inflation has moved near the Fed’s target annual rate of 2%, the body has become more focused on the employment side of its two-part mandate in the face of a U.S. jobs market that has seen growth slow markedly alongside upticks in the unemployment rate.
Wednesday’s change puts the Fed’s benchmark rates in the 4.75% to 5% range. The larger reduction should, theoretically, incentivize consumer and business spending and help bolster the U.S. jobs sector.
Before the adjustment, the Fed’s overnight intrabank lending rate stood at 5.25% to 5.5% since last summer and was the highest in 23 years after a series of 11 straight increases levied earlier by the monetary body in its efforts to quash inflation.
Per a federal report released earlier this month, U.S. inflation stretched its streak of tick downs to five months straight in August with overall prices on consumer goods and services rising by 2.5% last month, down from July’s 2.9% annual rate.
Following unexpectedly dismal July tallies that sparked fears of an economic slowdown, the August jobs report from the Labor Department found hiring moved up as the unemployment rate ticked down.
Total non-farm payroll employment increased by 142,000 in August, up from July’s 117,000 and the unemployment rate edged down to 4.2% from last month’s 4.3% rate, according to the most recent Employment Situation Summary from the U.S. Bureau of Labor Statistics. Hiring increases in the construction and health care industries helped drive the latest jobs data.
The overall number of unemployed U.S. workers stayed relatively steady month-over-month at 7.1 million in August, but was up significantly from this time last year when around 6.3 million workers were jobless and unemployment registered at 3.8%, reflecting continued slowing but ongoing growth in the jobs sector.
Where the Federal Reserve sets its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution’s total deposits — trickles down to consumers in numerous ways.
First, mortgage rates don’t necessarily move in tandem with the Fed’s rate increases. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic, and were hovering around 2% in late 2021, the rates tracked up alongside the Fed’s series of 11 hikes to its federal funds rate.
As of Wednesday, the average rate on a 30-year fixed rate mortgage was 6.2%, according to tracking by Freddie Mac, down almost a full percentage point from this time last year and a decrease of .15% from a week ago. Last October, that rate reached nearly 7.8%, the highest since the late 1990s, but still not excessive from a historical perspective. Home mortgage rates breached the 18% mark in the early 1980s, for example.
Higher rates can also make accessing credit, like qualifying for a home mortgage or new car loan, more difficult as banks tighten lending policy to reflect economic conditions. A poll conducted in March by Bankrate found half of U.S. applicants have been denied a loan or financial product since the Fed began raising interest rates two years ago. Americans with credit scores below 670 have been finding it tough to access credit.
Rates on loans for cars and trucks, currently around 8.7% and the highest since the early 2000s, should see some easing thanks to the Fed cut. As recently as three years ago, average rates on vehicle loans were coming in below 5%.
Credit card rates are set by issuing institutions based on a number of factors, including the card applicant’s personal credit history, but base rates are computed in part using the prime lending rate which is tied to the Fed’s benchmark rates. According to the Consumer Financial Protection Bureau, over the last 10 years, average (annual percentage rates) on credit cards assessed interest have almost doubled from 12.9%in late 2013 to 22.8% in 2023 — the highest level recorded since the Federal Reserve began collecting that data in 1994.