With inflation easing, the Federal Reserve announced a 50 basis point cut to its benchmark interest rate on Wednesday — the first reduction in borrowing costs since March 2020.
The central bank’s federal funds rate is now in a range of 4.75% to 5%, which will give Americans a break on their monthly credit card, personal loan, auto financing and mortgage costs.
Prior to Wednesday’s cut, the Fed had implemented 11 consecutive rate hikes over the past two years in an effort to tame inflation, which peaked at a year-over-year rate of 9.1% in June 2022.
While the current inflation rate of 2.5% is still below the Fed’s 2% target, the central bank is confident that price growth is on a sustained downward path.
The decision was also made in part because of the slowing job market. Since high borrowing costs discourage business investment, it can lead to decreased hiring. The Fed’s dual mandate is to both keep inflation low and maximize sustainable employment.
“The upside risks to inflation have diminished,” Federal Reserve Chair Jerome Powell said in a speech on Aug. 23. “And the downside risks to employment have increased.”
How much cheaper borrowing costs could be
The Fed’s key interest rate — known as the federal funds rate — is used by lenders to determine rates on credit cards and loans.
While a rate cut of half a percentage point will reduce borrowing costs, don’t expect more than a few bucks off most loan payments each month. That said, those small savings can really add up if you’ve got multiple debts, which is true for many Americans.
Plus, this rate cut is likely the first of several, with 76% of traders expecting the federal funds rate to fall to a range of 4% to 4.75% by late December, according to data from the CME FedWatch Tool.
Here’s a look at how the 50 basis point interest rate cut will affect your payments, based on loan or credit type, according to Bankrate:
- Credit cards: Interest rates will drop by about 50 basis points within a couple of billing cycles, bringing the current average rate of 20.78% down slightly. For a balance of $5,000, it will amount to a few bucks off monthly interest payments.
- Auto loans: Payments for a new loan worth $35,000 spread over five years would drop by $8 per month based on a rate cut of half a percentage point.
- Home equity lines of credit: Payments on a $50,000 HELOC would decrease by $20.84 per month.
- Adjustable rate mortgages: Payments will drop slightly. Mortgages are less directly tied to the Fed’s benchmark rate, so the amount of savings will vary based on the terms of the loan.
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