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The Federal Reserve took the widely anticipated step on Wednesday, announcing its first interest rate cut in years. The move will have a significant impact on the finances of all Americans, making credit cheaper even as the golden days of high-yield savings may be over.

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What impact do Fed interest rate cuts have?

The Fed officially controls only the federal funds rate, which sets the interest rate on overnight cash reserve transactions between banks. But the central bank’s interest rate decisions affect borrowing costs across the board, because lenders typically set interest rates based on the range set by the Fed, and rate cuts will also have broad implications throughout the economy. Here are some of the most tangible effects of rate cuts on the average American:

Housing

Mortgage loans are probably the most obvious shock to consumers from rate cuts, as they are closely tied to Treasury yields, which in turn are a reflection of the Fed’s monetary policy. Mortgage rates on 30-year fixed loans already hit a 19-month low of 6.2% last week as brokers prepared for the upcoming rate cuts. The downward trend is likely to continue as the Fed prepares for more rate cuts.

Car loans

With lower Fed rates, consumer credit will become cheaper, including auto loans, which are currently at their highest rate since 2001. In 2021, the interest rate on new car loans was below 5% and will now be about 8.7%. The cost of other debts, such as variable-rate private student loans and credit card interest, should also fall.

Job market

Companies also benefit from better lending. Lower interest rates usually lead to more positive hiring policies, as employers’ profits increase due to lower credit costs.

savings

Perhaps the biggest negative impact of the rate cuts on Americans’ finances is that the high-yield savings accounts, certificates of deposit and money market funds that have offered savers attractive returns over the past two years will lose some of their luster. These are closely tied to the federal funds rate, meaning that returns on these accounts will fall quickly as the Fed cuts rates.

How interest rate cuts affect stocks

Rate cuts are typically seen as a boon for stocks as money moves out of lower-yielding Treasuries and money market funds and investors look for more attractive returns. The S&P 500 has gained 86% of the time in the 12 months since the first rate cut in a cycle stretching back to 1929, according to Charles Schwab.

What did Jerome Powell say about the Fed’s interest rate cuts?

In a press conference Wednesday afternoon, Fed Chair Jerome Powell took a fairly even-keeled stance, noting that the economy is in “good shape” and that the aggressive cut should “keep” it in a healthy situation with “solid” growth, falling inflation and a stable labor market. Powell declined to make broad statements about the speed or magnitude of future rate cuts, but referred to them as a “cutting cycle,” suggesting they are not a one-off event. Quarterly forecasts also released Wednesday showed that average Fed staff forecasts predict another 50 basis point cut this year and another 100 basis points in 2025, narrowing the target range to 4.25% to 4.5% and 3% to 3.25%, respectively.

Contra

Although interest rates will soon fall, the U.S. is unlikely to return to the low-interest rate environment that has become the norm. The Fed is forecasting a long-term benchmark interest rate of 2.9%, higher than rates were ever at March 2008 through September 2022, and a far cry from the near-zero rates seen from December 2008 through December 2015 and from March 2020 through March 2022.