What does this mean for you?

The Federal Reserve announced Wednesday it will cut its benchmark interest rate by half a percentage point, or 50 basis points, paving the way for relief from high borrowing costs that have hit consumers hard.

The federal funds rate, set by the US central bank, is the rate at which banks borrow and lend to each other overnight. While that’s not the rate consumers pay, the Fed’s moves still affect the lending and savings rates they see every day.

Wednesday’s cut puts the federal funds rate in the 4.75%-5% range.

A series of rate hikes starting in March 2022 took the central bank’s benchmark to its highest level in 22 years, sending consumer borrowing costs soaring — and putting many households under pressure.

Now, with inflation easing, “there are reasons to be optimistic,” said Greg McBride, chief financial analyst at Bankrate.com.

However, “a rate cut is not a panacea for borrowers struggling with high financing costs and has little impact on the overall household budget,” he said. “What will be more important is the cumulative effect of a series of rate cuts over time.”

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“There are always winners and losers when there is a change in interest rates,” said Stephen Foerster, professor of economics at the Ivey Business School in London, Ontario. “In general, lower interest rates favor borrowers and hurt lenders and savers.”

“It really depends on whether you’re a borrower or a saver, or whether you currently have borrowing or savings rates locked in,” he said.

From credit cards and mortgage rates to car loans and savings accounts, here’s how a Fed rate cut could affect your finances in the coming months.

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. Due to the central bank’s rate hike cycle, the average credit card interest rate has risen from 16.34% in March 2022 to more than 20% today — near an all-time high.

In the future, the annual rates will begin to decrease, but even then, they will reduce the extremely high levels. With only a few cuts on deck for 2024, APRs will still be around 19% in the coming months, according to McBride.

“Interest rates go up in the elevator, but they will go down the stairs,” he said.

That makes paying off high-cost credit card debt a top priority, since “interest rates aren’t going to drop fast enough to get you out of a tight spot,” McBride said. “Zero percent balance transfer offers remain a great way to increase your efforts to pay down your credit card debt.”

Although 15- and 30-year mortgage rates are stable and tied to Treasury yields and the economy, anyone shopping for a new home has lost significant purchasing power over the past couple of years, in part due to inflation and policy moves of the Fed.

But rates are already significantly lower than they were just a few months ago. Now, the average interest rate on 30-year fixed-rate mortgages is about 6.3%, according to Bankrate.

Jacob Channel, senior economist at LendingTree, expects mortgage rates to remain somewhere in the 6% to 6.5% range in the coming weeks, with the possibility of even falling below 6%. But they are unlikely to return to pandemic-era lows, he said.

“Although declining, mortgage rates remain relatively high compared to where they have been for most of the last decade,” he said. “Additionally, home prices remain at or near record highs in many areas.” Despite the Fed’s move, “there are a lot of people who won’t be able to buy until the market gets cheaper,” Channel said.

Although auto loans are steady, higher vehicle prices and high borrowing costs have stretched car buyers “to their financial limits,” according to Jessica Caldwell, Edmunds’ chief information officer.

The average interest rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. But the Fed’s rate cuts will take away some of the rising cost of financing a car — possibly bringing rates below 7 percent — helped in part by competition among lenders and more incentives in the market.

“Many Americans have delayed making vehicle purchases in hopes that prices and interest rates will drop or that incentives will return,” Caldwell said. “A Fed rate cut wouldn’t necessarily drive all of those consumers back into the showrooms right away, but it would certainly help nudge holding back car buyers into more of a spending mood.”

Federal student loan interest rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable interest rate tied to the Treasury bill or other interest rates, meaning that once the Fed starts lowering rates, the interest rates on those private student loans will decrease over a period of one or three months, depending on the benchmark, according to higher education expert Mark Kantrowitz.

Eventually, borrowers with existing variable-rate private student loans may be able to refinance to a less expensive fixed-rate loan, he said. But refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, such as deferments, forbearances, income-based repayment, and loan forgiveness and discharge options.

Plus, extending the loan term means you’ll end up paying more interest on the balance.

While the central bank has no direct influence on deposit rates, returns tend to correlate with changes in the target federal funds rate.

As a result of the Fed’s rate hikes, rates on top-performing online savings accounts have made significant moves and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from about 1% in 2022, according to at Bankrate.

If you haven’t opened one high yield savings account If you’ve still locked in a certificate of deposit, you’ve probably already missed the interest rate peak, according to Matt Schulz, credit analyst at LendingTree. However, “yields are not going to fall off the cliff immediately after the Fed cuts rates,” he said.

While those rates have likely peaked, it’s worth your time to make some of these moves now before rates drop even further, he advised.

One-year CDs now average 1.78%, but top-yield CD rates pay more than 5%, according to Bankrate, as good as or better than a high-yield savings account.

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