How Does the Fed Rate Affect You?

The Federal Reserve recently announced that it cut its benchmark interest rate by a quarter percentage point, the first cut since the 2008 financial crisis. The new short-term range will be between 2% and 2.25%.

The rate they reduced is the federal funds rate, which is what banks and other financial institutions charge one another for very short-term borrowing. Most consumers don’t do that sort of overnight borrowing, but the Fed’s moves still affect the borrowing and saving rates they encounter every day.

The effect is usually not immediate, so most Americans won’t notice. In fact, the small cut is not likely to have a big affect on the average American. Most of the rate cut is its factored into longer-term interest rates like mortgage rates and auto loans. What the rate cut will affect is money market funds and CD deposits.

Also, one of the biggest potential impacts of the Fed’s cut may be one you don’t see. The fact that we may be heading into a recession. The rate cut is supposed to prevent the economy from weakening and forestall layoffs and other economic damage that could hurt workers and consumers.

In your financial life, over time, you will borrow and save money. The fed rate will affect how much you pay in interest and how much interest you earn. It could also affect your job security. By moving to reduce rates, now and possibly again this fall, policymakers are trying to reduce the risk that millions of Americans could be thrown out of work. They are trying to ward off the prospect of a job-killing recession by giving the economy a little extra boost.