Federal Reserve announces first interest rate cut since 2020. What you should know
The Federal Reserve on Wednesday announced its first interest rate cut since March 2020 in an attempt to provide much-needed relief for consumers when it comes to home and auto purchases, as well as credit card debt.
This announcement brings a 0.5% reduction from the Fed's 23-year high benchmark rate of 5.25% to 5.50%, which was a result of several rate hikes implemented to tame high inflation from the pandemic. This step is also expected to be the first in a series of rate cuts throughout the end of 2024 and into 2025.
"We're committed to maintaining our economy's strength by supporting maximum employment and returning inflation to our 2% goal," said Federal Reserve Chairman Jerome Powell. "Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by a half percentage point."
The federal funds rate is an interest rate set by the Federal Open Market Committee that commercial banks in the U.S. can charge one another to borrow or lend money overnight or for a few days.
While this new benchmark rate of 4.75% to 5% won't dictate how much lenders are allowed to charge borrowers, it will influence the interest rates on consumer products like mortgages, home equity loans, credit cards and student loans.
What will be affected by the Fed rate cut?
Interest rates for new loans are expected to drop relatively quickly, while those who have existing debt with a variable interest rate may see a difference in their rate within one or two billing cycles, according to Bankrate. Those with fixed-rate debt won't see an impact from this rate cut.
“Mortgage rates have fallen from a peak of 8% last October to a 19-month low of 6.31% now. But further declines could come at a more modest pace, and we’re not going back to the sub-3 percent mortgage rates of 2020 and 2021," said Bankrate Chief Financial Analyst Greg McBride. "While lower mortgage rates will help from an affordability standpoint, other variables like home prices and the availability of homes for sale will be just as important to prospective home buyers.”
Yields on savings accounts and CD accounts will also be affected by the Fed rate cut, Bankrate said. Returns on those accounts will likely decline as interest rates begin to fall.
"Importantly, this rate cut is just the beginning. By itself, one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget," McBride said. "What will be more significant is the cumulative effect of a series of interest rate cuts over time.”
Maddie McGay is the real estate reporter for NorthJersey.com and The Record, covering all things worth celebrating about living in North Jersey. Find her on Instagram @maddiemcgay, on X @maddiemcgayy, and sign up for her North Jersey Living newsletter. Do you have a tip, trend or terrific house she should know about? Email her at MMcGay@gannett.com.
This article originally appeared on NorthJersey.com: Federal Reserve interest rate cut announced: What it means
