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KEY TAKEAWAYS
- The Federal Reserve cut its influential federal funds rate on Wednesday, making it a percentage point lower than at the beginning of the year.
- Fed officials, however, predict that they’ll likely reduce their rate less aggressively by 2025. Some economists believe the Fed’s first policy meeting in the new year will be a hold on rates.
- It is crucial to monitor your borrowing rates and your savings accounts. Financial advisors advise that you should not act on predictions and instead diversify your investment and savings.
Federal Reserve cut the benchmark interest rate Wednesday. However, it may not be its last.
The Fed, following a policy committee meeting, announced that it had cut the influential federal funds rates by one quarter of a percentage point. This is a whole percentage point less than it was at the beginning of the year. Central bankers have also announced their projected policy paths for 2025. On average, they expect rates to be cut much more slowly than originally expected.
This rate affects all borrowing costs such as auto loans, mortgage rates, credit cards, and even interest on credit cards. That means Wednesday's developments could affect your budget going into the new year. Here's what financial advisers suggest you do after the Fed's rate cut.
Be Aware of What Your Bank Is Doing
The federal funds rate is a target range for borrowing costs charged by commercial banks when they lend excess reserves to each other overnight.
After Wednesday's cut, banks will likely charge each other less to borrow money. These changes will be passed on by the banks to their clients, leading to lower interest rates and loan terms. They are under no obligation to follow the interest rate or notify their customers of changes.
Robert Persichitte, a certified financial planner for Delagify Financial, suggested diligence as a consumer. Banks have the right to alter their interest rate at any time, which is why it’s important for you to monitor both your savings and borrowing rates.
“Just because interest rates rise or fall, that doesn't mean your account is going to move in either direction," he said.
‘Don't Think That You 100% Know the Future’
While Fed officials, on average, indicated they foresee only two quarter-point rate cuts in 2025, the economic projections are only a snapshot and could change as the economy shifts.
“We have no guarantee that rates will continue to fall and they could potentially rise," Persichitte said. "So don't think that you 100% know the future.”
Economists broadly expect the Fed will hold rates where they are when the policy committee meets in January, meaning they will stay the same until they meet again in mid-March. However, predictions beyond that are likely to be murky.
“If your local sports team is going to win or lose this weekend, you can kind of bet on that and have a little bit of knowledge about it,” Persichitte said. “'Are they going to win the championship this season?' This is less obvious. And then, 'are they going to win the championship 10 years from now?' It’s extremely unclear.”
Diversify Where You Have Your Money
Since you can never be sure of what will happen next, diversifying your investments is best in times of change, said Certified Financial Planner David Demming Sr.
Investing your money in mutual funds or ETFs can provide you with a portfolio of different stocks or bonds that spread risks across multiple investments, he said. For savers, Persichitte suggested locking in a long-term CD or building a bond ladder to boost your returns.
“Show discipline and patience because when people panic is when they shoot themselves in the foot,” Demming said.
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