Fed cuts key interest rate by a quarter-point: What does it mean for you?
Federal Reserve cuts interest rates by .25 percent
The Federal Reserve cut its key interest rate Wednesday by a quarter-point — its third cut this year — but also signaled that it expects to reduce rates more slowly next year than it previously envisioned, largely because of still-elevated inflation. The Fed’s 19 policymakers projected that they will cut their benchmark rate by a quarter-point just twice in 2025, down from their estimate in September of four rate cuts. Their new projections suggest that consumers may not enjoy much lower rates next year for mortgages, auto loans, credit cards and other forms of borrowing.
WASHINGTON - The Fed announced Wednesday a quarter-point cut to its benchmark rate, from about 4.6% to roughly 4.3%.
This is the third rate cut - and final one - of the year. Here’s what to know and what it means looking into 2025:
Why does the Fed cut rates?
With inflation now much lower — at 2.3% in October, according to the Fed's preferred gauge, down from a peak of 7.2% in June 2022 — many Fed officials argue that interest rates don't need to be so high.
The rates went higher to help tame inflation, which reached a four-decade high in 2022.
How does the Fed rate affect Americans?
03 October 2024, USA, Washington: The US flag flies over the Federal Reserve. Photo: Valerie Plesch/dpa (Photo by Valerie Plesch/picture alliance via Getty Images)
Over time, Fed rate cuts can have an impact to varying degrees on borrowing costs for auto loans, mortgages and credit cards, as well as for business loans.
The rate cut aims to ease borrowing costs and boost economic growth as companies and consumers could refinance loans into lower-rate debt.
But it appears unlikely that Americans will enjoy that noticeable lower borrowing costs any time soon.
For example, the average 30-year mortgage rate was 6.6% last week, according to mortgage giant Freddie Mac, below the peak of 7.8% reached in October 2023. But the roughly 3% mortgage rates that existed for nearly a decade before the pandemic aren't going to return in the foreseeable future.
On the flip side, returns on high-yield accounts have dropped in tandem with the Fed's rate cut.
2025 rate cuts
The central bank targets inflation at 2%, and inflation has remained a bit stuck at a current rate of about 2.3%.
Looking into next year, instead of a rate cut at each meeting, policymakers now envision just two rate cuts next year, rather than the four they had envisioned three months ago.
Changes under president-elect Donald Trump could also factor in, such as the proposed tax cuts or tariffs.