On Wednesday, July 31, the Federal Reserve lowered interest rates for the first time since the global financial crisis—in other words, the first time in over a decade. The Fed reduced their benchmark interest rate by 25 points, bringing the federal funds rate down to a target range of between 2 and 2.25 percent.
Why drop the interest rate? The short answer is “to protect our recently-recovered economy.” The longer answer, according to Federal Reserve Chair Jerome Powell, is “to insure against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are currently having on the economy, and to promote a faster return of inflation to our symmetric 2 percent objective.”
The fed funds rate sets the tone, as it were, for other interest rates. If the fed funds rate goes up, expect to see other types of interest rise as well. Now that the fed funds rate has gone down, well… what does that mean for your credit?
You may pay less in credit card interest
Now that the feds have lowered their benchmark interest rate, you might start to see lower credit card interest rates as well. Credit card interest is generally tied to what’s called the “prime rate,” which represents the interest rate lenders give their prime customers. If you’ve got great credit, you might be eligible for the prime interest rate. If you’ve got less than great credit, you’ll get charged interest over the prime rate.
The prime rate is tied to—you guessed it—the fed funds rate. So if the fed funds rate goes down, the prime rate goes down and your credit card interest might go down. Credit card interest reached record highs this July, so any reduction in interest, no matter how small, is to your benefit. If you don’t see any changes to your credit card interest rate, it might be time to negotiate a better APR.
You may earn less interest from your bank
Credit card lenders aren’t the only ones interested in the fed funds rate. Now that the benchmark interest rate is down, expect to see savings account interest drop as well. Why? Because when the feds say “it’s time to lower interest rates,” banks pay attention too.
So you’ll probably earn less interest on savings accounts, CDs and other bank products. This might be the right time to review what other banks are offering—when rates are down, it’s a good idea to make sure your money is going where it can earn the most interest. (It’s a good idea when rates are up, too.)
You may pay less interest on your car loan—if you’ve got a variable rate
Auto loans also come with interest rates, and they come in two flavors: fixed and variable. Fixed interest rates are exactly what they sound like. Whatever interest rate you receive at the beginning of the car loan remains constant throughout the life of the loan, so make sure you’re happy with it.
Variable interest rates, as you can probably guess, vary. Like credit cards, which also offer variable interest rates, auto loan interest rates are ultimately linked to the fed funds rate—which means when one changes, the other usually changes too.
If you currently have a variable car loan, your interest could drop. If you’ve got a fixed loan, you’re stuck with whatever rate they offered you. However, if you’re shopping for a new car, you might get a lower interest rate on both a fixed and a variable rate loan.
Your mortgage might not be affected
Mortgage loans, like car loans, come with both fixed and variable interest rates. If you have a fixed interest rate on your mortgage, you’re not going to see any changes—but you might not see a change if you have a variable rate mortgage, either.
Why? Because mortgage interest rates are already the lowest they’ve been since 2016, for starters. Also, the mortgage interest rate isn’t tied as closely to the federal reserve benchmark interest rate. Mortgages often take their cues from the 10-year Treasury yield, which is a whole different benchmark.
So if you’re in the market for a mortgage, you might be able to get yourself a good deal on the interest rate—but it might not have much to do with the Feds.
The bottom line
Now that the Federal Reserve has lowered its benchmark interest rate, expect to see consumer interest rates drop as well. This means you might pay less interest if you carry a balance on a credit card, but you might earn less interest from your savings account.
The fed funds rate decision was designed to strengthen our entire economy, so it could also have a positive effect on stock market growth, job growth and other economic indicators. To quote Chair Powell one more time: “The outlook for the U.S. economy remains favorable, and this action is designed to support that outlook.”