How the Fed’s Rate Cuts Will Affect Your Money—And What to Do About It

The Federal Reserve cut its influential interest rate for the second meeting in a row last week to boost the economy and prevent a rise in unemployment, but it may take a while for consumers to see its effects.

The two interest rate cuts have put downward pressure on borrowing costs of all kinds, including credit cards, auto loans and mortgages. However, consumers are wondering when they will feel the effects.

Investopedia spoke with certified financial planner Chad Olivier about how interest rate cuts will affect consumers’ finances. The interview has been edited for brevity and clarity.

INVESTOPEDIA: When and where can consumers expect to start seeing interest rate cuts make a real difference in their finances?

CHAD OLIVIER: Unfortunately, the higher interest rates on CDs, money markets, and savings accounts will probably be the first thing that you see drop. You’ve been getting pretty good interest rates on those types of investments, and those are the ones that I’m going to say that are probably [going to be] affected first.

Then, if the Fed consistently starts to lower, say, the next two to three times, the market will get used to that. Then, we’ll see the mortgage rates start to come down next. From that point, the high-interest loan debt will be the last of the legs that the consumer will start to see come down.

Realistically, the Fed has to cut probably a few more times before the consumer really starts to see it and the market really starts to believe that they’re going to continually cut in this economy, which should be slowing down. We’ll see with the policies of the new administration coming in.

INV: What should investors and savers do to prepare for future interest rate cuts?

OLIVIER: Even though interest rates are coming down, still try to take advantage of any interest that you can get on investments. If there are fixed investments out there, CDs, or any type of fixed bonds that you can lock in on some higher interest now, that may make sense.

If you’re holding bonds ETFs or anything in the bond market, as interest rates go down, the overall value of those investments goes up. So, for our portfolios, we started to add more to that bond sector to take advantage of what we see in the foreseeable future.

We see it in the future that we’re going to have lower interest rates, just as kind of the nature of the beast—they rose so much, and now they’re going to start to lower it so that we keep this economy going. That will help investors, especially more conservative investors, where the value of their bonds and the value of the bond market should appreciate during this next year.

INV: What should consumers look at while preparing their finances for next year?

OLIVIER: I would say if [a consumer is] looking to purchase a home anytime soon or some type of big debt item, they may want to wait a couple of quarters to see what the lowering of interest rates really is going to do.

The key to watch is inflation. If inflation is intact and controlled, then we’ll have an economy that will continually grow. If it’s growing too fast, then the Fed may stop lowering interest rates to make sure they can control inflation. So that’s kind of the key to where we go from here.