The Federal Reserve Lowered Rates for the First Time in Over a Decade — What It Means for You

Federal Reserve

The Federal Reserve Lowered Rates for the First Time in Over a Decade — What It Means for You

Last week, the U.S. Federal Reserve cut interest rates for the first time in more than 10 years. The federal open market committee moved the federal funds rate down to 2.25% from 2.5%. That puts it back to the rate it was before the last increase at the end of 2018. The lower federal funds rate is the Fed’s reaction to a slowing global economy and lower-than-expected inflation. These factors — and the fact that the last time the Fed reduced the rate was during the Great Recession — are leaving many people wondering, “What does it mean for me and my financial situation?” 

First things first, let’s not jump to conclusions. After all, the economy is in its longest stretch of growth in recorded history. Plus, unemployment is very low, hovering at or below 4% over the past year.

But part of the reason for the Fed’s rate cut was low inflation — except it’s counter-intuitive. More people with jobs and, therefore, income should mean more spending and higher inflation. However, even though unemployment is around the lowest it’s been in about 50 years, inflation hasn’t kept pace. Farewell, Phillips curve

But low inflation is a good thing when it comes to the spending power of a dollar. And that brings me to another positive point: The rate cut is meant to boost the economy. The Fed made this type of cut to hedge against a weaker economy in the future because of the potential impact of that slowing global economy as well as President Trump’s ongoing trade war with China.

Of course, in other news from last week, Trump tweeted the newest offensive in that trade war. He announced new 10% tariffs on $300 billion of Chinese goods starting Sept. 1. And the markets took a hit Monday — with the biggest drop in a year — as China apparently devalued its currency in response. 

How Will It Affect My Savings and Investments?

It likely won’t — at least not right away. Remember, the “federal funds rate is the interest rate banks charge each other to lend reserve balances to one another overnight.” Since it’s a bank-to-bank rate, the cut probably won’t change bank-to-consumer borrowing rates immediately. Still, savers could see their savings account rates dropping slightly to keep pace — but it’s likely not a good reason to pull cash out of your high-yield savings account.

But what about investments? While the stock market saw a small dip following the rate cut announcement last week, it’s also important to take a historical perspective. In the past, markets have seen increases after Fed rate cuts due to borrowing rates going down. Take the time to discuss your investment portfolio with your advisor and/or evaluate how it is positioned. It may make sense to hold or even increase your exposure to stocks in the coming weeks and months, depending on your circumstances.

What Does It Mean for My Current Debt and Future Borrowing or Refinancing?

If you have a fixed rate on your debt, it’s set as-is, so don’t expect any changes. If you’re considering refinancing, however, it could be a great time to do so. Lower Fed rates tend to influence other borrowing rates, so you might look into refinancing, especially after feeling out whether this is the first in a series of rate cuts that could mean even lower borrowing rates in the future. 

And if you’re about to take on new debt or you have variable rate debt, you could be in luck as these rates could drop along with the federal funds rate. However, rates like those for mortgages and car loans are already relatively low, so it could already be the right time to obtain financing. But it’s also important to keep in mind that these rates have been low for some time now. If you’re going to take the leap, don’t forget to include other factors in your decision, like the market for your purchase, your overall personal financial position, and much more.

One rate that probably won’t change much: Your credit card. While rates may drop in concert with the Fed’s rate cut, credit card rates will likely remain relatively high compared to other forms of borrowing — or they might not drop at all. In fact, credit card rates have reached their highest point in 25 years, “and the Federal Reserve’s rate cuts are no guarantee that they will receive much relief.”

Are We Entering Another Recession?

The short answer is no — at least, that’s what a move like this is attempting to side-step. Remember that the Fed made the rate cut to stimulate the economy and prevent a slump, and we’re definitely not currently in a recession. This advance action could help avoid the potential for a recession in the nearer-term future. Speculation might run amok but, for now, only time will tell.

All in all, the Federal Reserve’s rate cut doesn’t carry with it any overly strong implications for individual investors. A quarter of a percent cut isn’t a huge change, after all. But, if the change has you worrying or considering making changes to your financial strategy, it’s best to check in with your financial professional before you act. Don’t let a fraction of a percentage interest rate cut throw off your long-term plan.

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Jason Speciner
Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of fee-only firm Financial Planning Fort Collins. He is also a member of the National Association of Personal Financial Advisors (NAPFA), Financial Planning Association (FPA), and XY Planning Network. Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.