The Fed’s quarter-point interest rate cut¹ in November, hot on the heels of September's larger half-point decrease, has many people wondering what it means for their wallet. These two reductions are the first since March 2020.²

The latest rate cut could ripple through your finances and impact your mortgage, credit cards, and savings accounts, as well as the overall economy. When Jerome Powell, chair of the Federal Reserve, cuts rates, the federal funds rate is lowered. This is the interest rate banks charge for short-terms loans to other banks. It dropped from a range of 4.75% to 5%,³ to 4.5% to 4.75% with the most recent rate cut.

Home sweet home

Mortgage rates⁴ tend to dip when the federal rate drops. Maybe you’ve been checking out a mid-century ranch home in the neighborhood, or you’re considering refinancing your loan to reduce monthly payments. This may be a good time to talk to your lender to see what deals are available.

Read more: Mortgage rates and the housing market

Impact on credit cards and loans

Credit card interest rates could trend downwards⁵ as well, giving your wallet some breathing room. Credit card rates are typically above the prime rate, which is the rate that banks charge their most creditworthy customers. It can decrease when the federal funds rate drops.

The same goes for personal loans. Whether you're consolidating debt or using a home equity line of credit (HELOC) for a kitchen renovation, a lower rate could be on the horizon.

Read more: Conditional loan approval: How it plays into the homebuying process

Saving strategies

The rate on savings accounts could be impacted as well. Currently, the annual percentage yields (APY) on high-yield savings accounts go up to around 5.25%.⁶ While a Fed rate cut might seem like it would automatically translate to lower APYs, that’s not always the case. Banks consider various factors when setting rates, including borrowing costs, competition, and overall economic conditions.

The bigger picture: The economy overall

Powell said⁷ that the central bank isn’t in a hurry to further cut rates, because the economy’s current strength allows the Fed to “approach our decisions carefully.” The economy is healthy, but the job market has slowed in the past year and inflation has been cooling.

Inflation: A rate cut could give the economy a little boost, but watch out for inflation creeping in. In October, the Consumer Price Index (CPI) increased 0.2%,⁸ moving the 12-month inflation rate to 2.6%. The CPI measures costs across a range of goods and services. The Fed has set a goal of 2%⁹ for inflation.

Job security: The job market slowed in October,¹⁰ with only 12,000 new jobs added, but it was impacted by union strikes and the impact of two back-to-back hurricanes in the southeastern U.S. The unemployment rate was steady at 4.1% in October, according to the U.S. Department of Labor.

Investments: Lower interest rates can make waves in the stock market: Investors want to know¹¹ how rates will impact investment strategies. If the rate cut is the result of a reduction in inflation, that can be perceived as positive for the market. If the rate cut ties into a slowing economy, then that can create an uncertain economic outlook.

Read more: New catch-up contribution: Retirement limits boosted for 401(k) savers in their early 60s

Optimism ahead

Empower's research paints a hopeful picture. The majority (60%) of Americans are feeling good about reaching their financial goals, and they're taking action. Paying off debts is key, with 47% accomplishing this lofty goal, and 40% are homeowners. An emergency fund is in place for 39%, and nearly one-third (32%) have retirement savings. An impressive 49% say they have a clear financial plan to meet their money goals.

But inflation is a pain. Empower's “Big Shrink” study shows how rising prices and shrinking product sizes are putting the squeeze on wallets, with 87% of Americans saying they feel the pinch. Over a quarter (27%) have hit a pricing limit and aren’t willing to pay anything extra for grocery staples.

Read more: Average retirement savings by age

The bottom line

The Fed's rate cut might seem like a small blip on the radar, but it's a reminder that the economic landscape is always changing. Stay informed and proactive to navigate those changes and try to achieve your financial dreams.

Effective Federal Funds Rate from November 2019 to November 2024