Winners And Losers From The Fed's Interest Rate Decision

The Federal Reserve just cut interest rates by 50 basis points, citing cooling inflation and signs of economic slowdown. This is the first time rates have been adjusted since July 2023, which ended a long streak of raising rates to tame inflation.

The latest Fed rate cut will shake things up for consumers—some folks will score, while others might take a hit.

“If you have more money in the form of debt than you do in savings, then on balance, you will benefit from rate cuts,” says Stephen Foerster, professor of finance at Ivey Business School, Western University. “But it’s more nuanced. A lot depends on whether you currently have locked-in borrowing or savings rates.”

With the latest rate cut in play, it may be time to reassess your finances. Here’s a breakdown of who stands to gain, who could face setbacks and what you can do to make the most of this shift.

Winners of the Fed’s Interest Rate Decision Credit Card Borrowers

Consumers with big credit card debt stand to gain the most from a rate cut, especially those with variable rates, says Mayra Rodríguez Valladares, a bank and capital markets risk consultant at MRV Associates and former Federal Reserve Bank of New York analyst.

However, with average credit card interest rates sitting at well over 20%, a 0.5% drop is unlikely to make a big difference.

Credit card interest rates skyrocketed from 12.9% in 2013 to 22.8% in 2023, according to a Consumer Financial Protection Bureau (CFPB) report. While the Fed’s rate changes affect credit card rates, nearly half of this increase is due to credit card companies raising their own fees (known as the APR margin) to boost profits.

So, you may be disappointed if you’re expecting a sizable drop in your monthly payment. Consider transferring your debt to a balance transfer card with a 0% introductory APR to avoid sky-high credit card interest rates, which are currently hovering around 27.9% as of September 19.

Auto Loan Rates

A rate cut could ease auto loan costs, but past trends suggest only minor savings.

Like credit cards, auto loan rates follow the federal funds rate closely, meaning car loan costs rise quickly when the Fed raises rates. However, when the Fed lowers rates, the relief for borrowers is slower and less noticeable, making rate hikes more immediately impactful than rate cuts.

From 2014 to 2024, auto loan rates for new car 48-month loans closely tracked the movement of the federal funds rate, with a noticeable lag when rates are cut.

In 2016, as the Fed hiked rates to 0.41%, auto loan rates rose from 4.25% to 4.45%. Similarly, in 2023, as the Fed raised rates aggressively to 5.33%, auto loan rates surged to 8.30% by August.

However, when the Fed slashed rates during the pandemic in 2020, auto loan rates dropped only modestly to 5.13% from 5.29%, despite the Fed rate falling to 0.05%. This shows that consumers feel the burden of higher rates much faster than the relief when rates are cut, impacting monthly auto loan payments.

While the recent rate cut might give you a slight advantage, you have the power to influence the auto loan rate you secure. Start by improving your credit scores—better credit typically means lower interest rates. Be sure to shop around, comparing offers from banks, credit unions and online lenders to find the best deal. Don’t buy more car than you can comfortably afford. And, if possible, make a larger down payment to reduce your loan size and land a more favorable rate.

Related: Car Loan Payment Calculator 

Stock Market Investors

When interest rates drop, both bondholders and stockholders benefit. Bondholders see a rise in bond prices as lower interest rates make their existing bonds more valuable. Stockholders gain because lower rates increase the present value of future cash flows, boosting stock prices.

“For bondholders, there’s an inverse relationship between bond prices and interest rates,” Foerster says.

That’s because when interest rates go down, the value of older bonds with higher interest rates goes up. For example, if you have a 10-year bond paying 6% interest, and new bonds are now offering only 5.5% interest, your bond becomes more valuable because it pays more. This means you could sell it for a higher price than what you paid.

Homebuyers

While the Fed doesn’t directly set mortgage rates, its moves often influence them. Mortgage lenders typically adjust their rates based on expectations of Fed policy changes, so recent mortgage rate drops already reflect the September rate cut.

If the Fed continues to cut rates, as many experts forecast they will, then mortgage rates may continue to fall, making homebuying more affordable in the coming months—although rates are unlikely to hit the lows we saw in 2020 and 2021.

It could also mean homeowners are more willing to sell their homes, says Clayton Gardner, CEO of Titan, a wealth management firm.

“Homeowners who purchased during the pandemic period have been hesitant to sell and give up their cheap mortgages,” Gardner says. “We expect that Fed rate cuts should help further increase the housing supply, which in turn should lower (home) prices.”

Homeowners Who Want to Refinance

A lower fed funds rate could benefit homeowners looking to refinance by making mortgage rates cheaper. This could lead to lower monthly payments and long-term savings for those able to lock in a new, reduced interest rate on their mortgages.

Remember to factor in closing costs. According to Freddie Mac, the average closing costs for a refinance are about $5,000, but the exact amount depends on the size of your loan and where you live, including your state and county.

For refinancing to make sense, you should figure out how long it will take to recoup the closing costs in monthly savings to determine if it’s worthwhile. If you plan on selling your home in the near future, a refinance may not make sense if the rate is not significantly lower.

For example, if you have a 30-year $300,000 mortgage at 7%, your monthly payment would be around $1,995. By refinancing to a 6.25% rate, your new monthly payment would drop to about $1,847, saving you roughly $148 per month. Over a year, you’d save about $1,776; over the full term of the loan, you’d save around $53,280. That means you would need to stay in your home for almost three years to break even if closing costs are $5,000.

You can use a mortgage rate calculator to see if refinancing is a good idea.

Adjustable Rate Mortgages

Adjustable rate mortgages (ARMs) could get cheaper now that the Fed cut rates. This happens because ARMs are often tied to the Secured Overnight Financing Rate (SOFR), which closely follows the Fed’s rate changes.

When the Fed raises or lowers the Fed Funds Rate, the SOFR typically moves in the same direction. As a result, ARM rates adjust during their reset periods based on these changes. So, if the Fed lowers rates, your ARM’s interest rate is likely to dip when it’s time for the next adjustment, which means lower monthly payments.

The most common ARM, a 5/1 ARM, has a fixed rate for the first five years, and then adjusts once a year for the remainder of the loan.

Losers of the Fed Rate Cut Savers

If the Fed cuts rates, your savings account interest will likely follow—just not as quickly. That means your money won’t grow as fast, so now’s the time to rethink your savings strategy.

In 2019, the federal funds rate was around 2.4%, and the average savings rate for a typical bank savings account hovered around 0.19%.

By contrast, in 2020, as the Fed dropped rates to near 0% to stimulate the economy during the pandemic, savings rates also fell, though the average interest rate for bank savings accounts was 0.12%.

Consider moving your cash into higher-yield accounts like CDs or money market accounts, which often adjust more slowly to rate cuts.

If you’re comfortable with a little more risk, you could also look into investments like bonds, which tend to perform better when rates fall. While savings rates won’t drop instantly, acting soon can help you secure better returns on your hard-earned cash before they dip even further.

Broader Economic Context

Lower rates typically encourage spending and investment, giving the economy a short-term boost. Businesses may take out loans to expand, which can create jobs and increase consumer spending.

“If a corporation has lower financing costs, then that will lower its overall cost of capital. The hurdle rate on new projects will be lower, which can lead to higher profits going forward, and potentially more hiring associated with increased demand,” Foerster says. “The potential effect on wages would be longer-term, depending on how tight the labor market is.”

The risks? If rates remain too low for too long, it can spur inflation and eroding purchasing power. Additionally, people may take on excessive debt due to cheap borrowing, increasing financial risks down the line.

What’s Next?

A Fed rate cut is a double-edged sword, offering relief to borrowers while putting pressure on savers. Consumers should be strategic—borrow wisely, invest carefully and protect their savings by considering alternatives like high-yield bonds or stocks.