After more than two years of high interest rates in the fight to contain inflation amid the COVID-19 pandemic, the Federal Reserve cut its benchmark interest rate by half a percentage point, which is likely to impact Americans in several ways.

The unusually large rate cut is the Fed’s first in more than four years and reflects a new focus on bolstering a weakening labor market.

From student loans and credit card debt to mortgages and car loans, here’s what Wednesday’s developments could mean for you:

How much did the Fed cut interest rates?

The central bank cut its benchmark interest rate to around 4.8 percent, ending 14 months of 5.3 percent, a two-year high, where it had been sitting as it tried to contain the worst wave of inflation in four decades. Inflation has fallen from a peak of 9.1 percent in mid-2022 to a three-year low of 2.5 percent in August, not far above the Fed’s 2 percent target.

The Federal Reserve is cutting its key interest rate by half a percentage point, the committee announced on Wednesday.

Are further interest rate cuts imminent?

Fed policymakers also signaled that they expect a further half-percentage point cut in the key interest rate at their last two meetings of the year in November and December. And they expect four more rate cuts in 2025 and two in 2026.

What impact will the interest rate cut have on you?

Over time, Fed rate cuts should lower borrowing costs for mortgages, auto loans and credit cards, strengthening Americans’ finances and leading to more spending and growth. Homeowners will be able to refinance mortgages at lower rates and save on monthly payments. They can even convert their credit card debt into cheaper personal loans or home equity loans. Businesses could also borrow more and invest more.

According to Freddie Mac, average mortgage rates have already fallen to an 18-month low of 6.2%, leading to a surge in demand for refinancing.

In a statement, the Fed came closer than ever to defeating inflation, saying it had become “more confident that inflation is moving sustainably toward 2 percent.”

Although the central bank now believes inflation has been largely defeated, many Americans remain angry about the still high prices of food, gasoline, rent and other essential goods. Former President Donald Trump blames the Biden-Harris administration for the rise in inflation. Vice President Kamala Harris, in turn, has accused Trump’s announcement to impose tariffs on all imports of raising prices even further for consumers.

While it might be justified for some to take action now to take advantage of lower rates, such as withdrawing money from a certificate of deposit or refinancing a mortgage, “you shouldn’t feel obligated to completely change your financial strategy just because rates are going down,” says Jacob Channel, a senior economist at LendingTree.

“Act cautiously and responsibly,” Channel said, “and don’t make hasty decisions based on a single Fed meeting or economic report.”

savings

As the Fed lowers its key interest rate, returns for savers will ultimately also fall.

“As attractive as savings returns have been recently, it’s wise not to hold too much cash because these are short-term investments and their returns are fleeting,” said Christine Benz, director of personal finance at Morningstar. “The really great returns we’ve had recently could fall even further.”

If you don’t need cash right away, you can still lock in what are “still pretty good yields,” she said. In that case, “longer-term certificates of deposit might make sense.”

“Lower interest rates make it harder to maximize savings and preserve the capital you built up while interest rates were higher,” said Matt Brannon, a personal finance expert at MarketWatch Guides. “One simple short-term measure to protect your savings is to move your funds into a high-yield savings account, which offers higher interest rates than traditional savings accounts… This type of savings account will still help you preserve your capital because of the comparatively higher interest rates.”

Credit card debt and other loans

“While lower interest rates are certainly a good thing for those struggling with debt, the truth is that this one rate cut isn’t going to make much of a difference for most people,” said Matt Schulz, credit analyst at LendingTree.

However, the Fed’s falling interest rate will ultimately lead to better terms for borrowers, many of whom are facing the highest credit card interest rates in decades. According to WalletHub’s August Credit Card Landscape Report, the average interest rate is 23.18% for new offers and 21.51% for existing accounts.

Still, “the best thing people can do to lower interest rates is to take matters into their own hands,” Schulz said. “Consolidating your debt with a 0% balance transfer credit card or low-interest personal loan can have a far greater impact on your debt load than almost anything the Fed will do.”

Mortgages

The Fed’s benchmark interest rate doesn’t directly determine mortgage rates, nor is it aligned with them. But it does have a large indirect influence, and the two “tend to move in the same direction,” according to LendingTree’s Channel.

In particular, mortgage rates had already fallen before the Fed’s forecast rate cut.

“This shows that mortgage rates can still change even if the Fed does nothing and just keeps rates stable,” he said.

Channel said the majority of Americans have mortgages at 5%, so rates may need to fall even further than the current average of 6.46% before many people consider refinancing.

Car loans

“With auto loans, it’s good news that rates are going to go down, but that doesn’t change the fundamental issue, which is that it’s still very important to shop around and not just accept whatever rate a car dealer offers you at the dealership,” said Greg McBride, an analyst at Bankrate. “It’s also very important to save as much as you can and try to put as much down on the car as you can.”

McBride predicts that the rate cuts and avoidance of a recession will lead to lower auto loan rates, at least for borrowers with good credit. For borrowers with worse credit, rates will likely remain in double digits for the rest of the year.

Robert Frick, corporate economist at Navy Federal Credit Union, said he thinks a rate cut will have an impact on auto loans, too. But it probably won’t happen immediately, and people with higher credit scores will likely benefit first.

According to Edmunds.com, the average interest rate on new car loans is currently 7.1%, while the interest rate on used car loans is significantly higher at 11.3%.

Those rates and still-high prices have discouraged many potential buyers from waiting for rates to fall. That’s partly why new-car sales in the U.S. rose a sluggish 2.4 percent through June.

High prices and interest rates have also led to more delinquencies and defaults on auto loans, especially among those with lower credit scores. As a result, Frick said, many lenders will likely try to keep interest rates high to cover potential losses.

“Interest rates will fall, but we should not expect them to fall quickly overall,” he said.

Frick recommends waiting for further interest rate cuts from the Fed if possible, especially if you are buying a used car.

Jeff Schuster, vice president of automotive research at Global Data, expressed doubt that modest interest rate cuts by the Fed would be enough to lure many buyers away from their cars unless automakers offered their own low-interest loans and other discounts.

“I believe there are still some cuts to be made before we can provide substantial relief to these consumers,” he said.

Inflation and the labor market

Consumer prices rose 2.5% year-on-year in August, up from 2.9% in July – the fifth consecutive decline and the smallest since February 2021.

Hiring increased slightly in August and the unemployment rate fell for the first time since March. Employers created 142,000 new jobs, compared to 89,000 in July. The unemployment rate fell from 4.3% to 4.2%, the highest level in nearly three years.

These signs suggest that the labor market remains stable despite the slowdown.

The pace at which the Fed continues its rate cuts after September will depend in part on how inflation and the labor market develop in the coming weeks and months.

Student loans

Higher education expert Mark Kantrowitz told CNBC that interest rates on federal student loans are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, those with private loans can have either a fixed or variable rate, meaning interest rates on those loans could drop over a period of one or three months, depending on the benchmark.

Borrowers with variable private student loans may also be able to refinance, but there are certain restrictions associated with doing so.