Federal Reserve Rate Cut 2024: Impact on Savings and Loans

At the time of this posting, the Federal Reserve announced a highly anticipated interest rate cut, raising questions about how this decision will impact personal finances. Whether you have a savings account, a CD, or a mortgage, understanding how the Federal Reserve Rate Cut in 2024 affects these areas can help you make informed decisions. In this guide, we’ll break down the implications of this rate cut and provide thoughts on how to navigate your finances effectively.

What is the Federal Funds Rate and Why It Matters

The Federal Funds Rate is the interest rate at which banks lend to each other overnight. While this may seem like something only relevant to banks, it has a significant effect on consumer interest rates. The Federal Reserve uses this tool to either encourage economic activity by lowering rates or slow down inflation by raising rates.

When the Fed cuts rates, borrowing costs decrease, making loans more attractive for consumers and businesses. Conversely, the returns on savings products, such as high-yield savings accounts and certificates of deposit (CDs), also tend to drop. The most recent Federal Reserve interest rate cut in September 2024 aims to stimulate economic activity during a period of slower growth. As NBC News reports, “the Fed is carefully managing rates to avoid economic contraction while keeping inflation in check” source. Understanding these shifts can help you adapt your savings and investment strategies effectively.

How the Rate Cut Impacts Savings Accounts and CDs

One of the most direct consequences of a Federal Reserve interest rate cut is the reduction in returns from savings accounts and CDs. If you have a high-yield savings account, you might see a decrease in the interest earned on your deposits.

According to the American Association of Individual investors, “FOMC members anticipate making more interest rate cuts this year, as their “dot plot” below shows. The median projection calls for the target rate to end 2024 at 4.4%.” Furthermore, “For 2025, the median end-of-year projection is now 3.4%, down from 4.1%.”. source.

High-Yield Savings Accounts in 2024

For savers who rely on high-yield savings accounts to grow their money, this rate cut will be noticeable. As rates decline, it’s wise to keep an eye on your bank’s offerings. While some banks will lower their rates quickly, others may take time to adjust, so shopping around for the best savings account rates can still yield benefits.

However, before making any moves, use tools like the CME FedWatch Tool to monitor potential rate changes. This resource helps predict Federal Reserve actions, giving savers a better sense of where interest rates might be headed next source.

Current CD Rates After a Rate Cut

Like savings accounts, current CD rates are likely to drop after a rate cut. CDs generally offer a fixed return, but the interest rate depends on when you open the account. If you locked in a CD before the rate cut, you won’t be affected until the CD matures. However, new CD offerings in 2024 are expected to reflect lower interest rates.

For those wondering whether to invest in a CD or stick with a savings account, consider how much you’re willing to tie up your funds. With CD rates vs. savings accounts, the latter offers liquidity and flexibility, while the former might provide slightly higher—but now reduced—returns.

Mortgage Rates and the Real Estate Market

One of the biggest questions people have after a Federal Reserve interest rate cut is: Will mortgage rates drop? The answer is often yes. Lower interest rates typically lead to reductions in mortgage rates, making it cheaper to borrow for home purchases or refinancing.

Mortgage Rates After a Rate Cut

With the most recent September 2024 rate cut, mortgage rates are expected to trend downward. As Bankrate notes, lower mortgage rates often follow Fed cuts, giving homeowners a prime opportunity to refinance or secure a better deal on a new mortgage source. For example, a 30-year fixed mortgage that was around 7% could fall closer to 6%, depending on market conditions.

If you’re thinking about refinancing your mortgage, keep in mind that while lower interest rates are appealing, there are costs involved. According to Morningstar, “lower interest rates have arrived, but homeowners should carefully consider the costs of refinancing” source.

Additionally, CNBC highlights that “refinancing can save you money in the long run, but there are upfront fees, so it’s essential to calculate the break-even point” source.

Investing in Treasury Bills After a Rate Cut

Federal Reserve Rate Cut 2024 Impact on Treasury Bills

Treasury bills (T-bills) are another low-risk investment impacted by Federal Reserve actions. Treasury bill rates usually fall after a rate cut, as the government adjusts the interest paid on these short-term investments. While T-bills remain a safe investment, lower returns might prompt investors to seek higher-yielding alternatives.

Reinvestment Risk in a Low-Interest Environment

One risk investors should be mindful of after a rate cut is reinvestment risk. As noted by Investopedia, reinvestment risk occurs when “investors cannot find another investment that offers the same rate of return after their current investment matures” source. This is particularly relevant for those who rely on fixed-income products like T-bills or CDs.

To mitigate this risk, you may consider laddering your investments—purchasing products with varying maturities to reduce the impact of declining interest rates.

Money Market Funds and Their Role Post Rate Cut

Federal Reserve Rate Cut 2024 Impact on Money Market Funds

Money market funds are a popular choice for investors seeking higher returns than a traditional savings account while maintaining liquidity. However, after a rate cut, money market fund rates typically decline as well. The returns on these funds are closely tied to short-term interest rates, which move in tandem with the Federal Reserve’s actions.

According to Schwab, the rates offered by money market funds at the end of 2023 remained competitive, but investors should monitor these rates closely in 2024 as they could decline following the Fed’s rate cut source.

Additionally, the Financial Research Office highlights that money market funds remain a stable option despite lower returns, offering liquidity and safety in uncertain times source.

Conclusion: Navigating the Rate Cut

The most recent Federal Reserve interest rate cut of 2024 and possible future cuts into 2025/2026 will impact everything from high-yield savings accounts and current CD rates to mortgage rates and treasury bills. Whether you’re saving for the future, buying a home, or looking for a safe place to park your money, understanding how the impact of a federal funds rate cut affects these products is crucial.

To navigate a potential lower-interest environment, consider reviewing your financial portfolio and consulting a financial advisor to optimize your strategy.

For more personalized advice, contact The Lynch Financial Group to discuss how these changes impact your unique financial situation.

Corey Shevlin

Corey serves as an investment adviser representative at The Lynch Financial Group, designing, implementing, and monitoring investment portfolios for wealth management clients. He specializes in portfolio optimization and developing comprehensive financial plans. He currently holds his Series 65, Life and Health Insurance licenses. He attended the University of Delaware and graduated with a Bachelor’s degree in Political Science and Criminal Justice in 2019. Disclosure Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“PCA”) an SEC registered investment adviser with its corporate registered office in the State of Ohio. PCA and its representatives are in compliance with the current registration requirements imposed upon registered investment advisers by those states in which PCA maintains clients. PCA may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Any subsequent, direct communication by PCA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. The Lynch Financial Group and PCA are separate, non- affiliated entities. PCA does not provide tax or legal advice. Insurance, Investment, and Tax Services offered through The Lynch Financial Group are not affiliated with PCA. Information received from this website should not be viewed as investment advice. Content may have been created by a Third Party and was not written or created by a PCA affiliated advisor and does not represent the views and opinions of PCA or its subsidiaries. This site may contain links to articles or other information that may be contained on a third-party website. PCA is not responsible for and does not control, adopt, or endorse any content contained on any third party website. For information pertaining to the registration status of PCA, please contact the firm or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about PCA, including fees and services, send for our disclosure statement as set forth on Form ADV from PCA using the contact information herein. Please read the disclosure statement carefully before you invest or send money. For important information related to PCA, refer to the PCA’s Client Relationship Summary (Form CRS), Form ADV Part 2A and Privacy Notice by navigating to www.prosperitycapitaladvisors.com.