If you’ve paid attention to financial news recently, you’ll have noticed there was some media attention regarding the Federal funds rate.  

On Wednesday, September 18, 2024, Federal Reserve Chairman Jerome Powell announced that the federal funds rate would decrease by .50 percentage points, or ½ a percent.  

For anyone unfamiliar with the federal funds rate, it’s the rate set by the Federal Open Markets Committee that banks use to lend money to each other overnight. What makes this rate so special is that it impacts everything for us as consumers, like any APYs earned on savings accounts, to the interest rates we pay on loans and credit cards.  

One Forbes Advisor article simply stated, “The fed funds rate effectively dictates the cost of money in the U.S. economy.”  

The Federal Reserve regularly meets to assess the economy, reviewing important aspects like inflation and unemployment. During this meeting, a decision is made to do one of three things: raise the rate, lower the rate, or keep the rate the same.  

It’s not entirely necessary to know all the ins and outs of how the rate is determined and its role in the financial market, but it is important to be aware of how a rate change can affect your finances. 

When the fed rate changes, it affects all aspects of the financial market, and there are many signs you should recognize when news hits that the rate was raised or lowered.  

When the rate increases, you may notice a few of these changes: 

• Interest rates on savings accounts and CDs go up 
• Rates for loans and credit cards go up 
• It can strengthen the dollar, thereby attracting foreign investors  
• It can slow down economic activity and decrease the rate of inflation 

Similarly, when the rate goes down, you’ll notice these changes: 

• Borrowing rates get cheaper, decreasing rates for loans and credit cards 
• Rates on savings accounts and CDs go down 
• It can weaken the dollar and deter foreign investors 
• Boost the stock market and stimulate economic growth by decreasing the borrowing costs for companies 

The good news is that there are opportunities for all of us, whatever the rate situation. We can use the rate environment to gauge what types of financial decisions we need to make. 

This recent rate decrease should spark some considerations for anyone monitoring their financial position.  

• It may provide an opportunity to tweak some budget items. Pay attention to your interest rates. If they go down, it could free up some cash that you could then reallocate to other budget line items.  
• Talk to a financial professional about your investment mix and ask whether adjustments should be made. Because the stock market is likely to be affected by the change in interest rates this might be a good time to reevaluate your investment portfolio to adapt to the changing economic climate.  
• It might be a good time to refinance any existing loans like your auto or house loan or even a good time for debt consolidation. Talk to a financial professional or mortgage originator to get an idea of any new rate and term options that may now be available. 
• For those waiting for lower rates, it might finally provide an opportunity to make that larger purchase, like a house. 

Due to the recent decision to lower the Fed rate, we are likely to see changes coming across the financial world in the coming months that will likely usher in new financial opportunities.  

To learn more about the fed funds rate and how it can impact your finances, as well as the Forbes article mentioned earlier in this episode, check out the list of links in the show notes for more information.