Last week the Federal Reserve announced a 50 basis point cut to its benchmark interest rate—the first reduction in borrowing costs since the pandemic began in March 2020. That federal funds rate now stands in a range of 4.75% to 5%, providing a break on credit card and personal loan rates across the board. While a rate cut of half a percentage point (aka 50 basis points) will certainly reduce borrowing costs, it's not going to provide drastic relief. And whereas some effects of the rate cut will be almost immediate (like credit card interest rates), others will take time to materialize (like more people refinancing mortgages).
Regardless of how large the break is, there are a few financial moves you might consider to take advantage and make the most of this interest rate cut.
Even before this rate cut, mortgage rates had dipped to their lowest point since May 2023, averaging 6.59% according to a Bankrate survey. Of course, lowered rates are one thing; the reality of refinancing is another.
Check your current rate and compare it to the new rates available. Even a 0.5% to 1% difference can result in significant savings over the life of your loan. Make sure to factor in your break-even point, so you can see how long it will take for the savings from the lower interest rate to offset the costs of refinancing.
While refinancing might not make sense for everyone, it could be particularly beneficial for homeowners who obtained mortgages during the recent rate hikes. Check out this mortgage refinance calculator from Bankrate to see if a refinance makes sense.
While mortgage rates might take some time to adjust, other forms of debt will see more immediate effects:
Personal loans: If you have a high-interest personal loan, look into refinancing options. You might be able to secure a lower rate now.
Auto loans: If you financed your car when rates were higher, investigate refinancing options. Even a small reduction in your interest rate can lead to significant savings over the life of the loan.
Unfortunately for savers, the interest earned on savings accounts may decrease, potentially right away. Now could be prime time for you to consider different savings products than you're using now, either before or after rates drop:
High-yield savings accounts: These accounts often offer better rates than traditional savings accounts. Even when interest rates on your savings account are low, a high-yield savings account is a savvy way to get some returns on funds you know you’ll be accessing in the next one to five years. Here's our guide to finding the best yields.
Certificate of deposit (CD) ladders: CDs are time-based, usually offered in terms ranging from three months to five years; longer terms come with higher interest rates. Consider building a CD ladder to take advantage of potentially higher long-term rates, while maintaining some liquidity in the meantime. When you build a CD ladder, you'll have CDs maturing in rotation, giving you better access to your cash without paying early withdrawal penalties.
Money market accounts: A money market account (MMA) is a way to earn higher interest rates than you would with a regular savings account. These might offer better rates than traditional savings accounts while providing more flexibility than CDs, but anyone who has become accustomed to yields of 5% or more on cash in recent years might benefit from reallocating their money if it’s not needed in the near future.
This rate cut is a great reminder why diversification matters in the first place. Make sure your portfolio is positioned for the lower rate environment and aligned with your personal goals and risk profile.
Consider increasing allocation to growth stocks: According to U.S. News, growth stocks are expected to continue to outperform value stocks as the Fed cuts interest rates. Lower interest rates can benefit growth-oriented companies that rely on borrowing to fund expansion. Here are the top performing growth stocks this month.
Stick with higher quality bonds: Bonds could jump in value, since investors will want the bonds issued at the higher interest rates from before the Fed cut rates. However, new bonds will offer lower yields at the moment.
Look into real estate investments: Lower interest rates can boost the real estate market. As mortgage rates decline, the housing market may see increased activity, with more people able to afford homes or refinance existing mortgages. Here's our guide to investing in real estate without a lot of money.
Remember, while a rate cut can provide opportunities, it's more important to consider your overall financial situation and long-term goals than making any significant changes in response to a rate cut. Always consult with a financial advisor for personalized advice tailored to your specific circumstances.
