This is the economic turnaround we’ve been waiting for. The Federal Reserve is expected to start cutting interest rates on Wednesday.

It took a long time to get to this point.

After inflation peaked at 9.1% in June 2022, the Fed attempted to rein in consumer prices with eleven interest rate hikes in the following months. Interest rates have remained unchanged since August 2023.

With inflation at 2.5% in August – tantalizingly close to the two percent target – Fed officials are signaling that they believe the time is finally right to cut interest rates.

Read more: Fed forecasts for 2024: What experts say about the possibility of a rate cut

How monetary policy works

The Fed controls one interest rate: the federal funds rate, the short-term rate that banks use to lend money to each other. The target range for the federal funds rate remains 5.25-5.50%.

The Fed’s interest rate decisions permeate the financial world and affect virtually every aspect of borrowing costs and savings rates. Interest rate control is monetary policy medicine that the Fed uses to:

• Slow down the economy by raising interest rates to contain rising costs (high inflation) as measured by the Consumer Price Index.

• Support an economic recovery when we are at the other end of a business cycle by lowering interest rates and thus injecting liquidity into the financial system.

• Give the Fed a chance to continue its past actions while it considers future actions by keeping interest rates stable.

For example, a reduction in the base interest rate could affect your loans and accounts.

Learn more: How inflation affects mortgage rates

Impact of lower interest rates on checking and savings accounts

Your short-term liquidity depends on the money in the bank. As interest rates rose, so did the interest rates on deposit accounts.

Soon, cash in the bank will earn less. Smart savers will have to look for the best returns as providers start to reduce their interest payments.

Current accounts

Current accounts with interest offer the poorest returns. But you need quick access to the money and if you have your cash flow under control, the bank won’t have most of that money for long.

On interest-bearing checking accounts, the national average was 0.07% per month in August 2023. A year later, that rate had risen to 0.08%. That’s probably the top of the small hill for checking account interest rates.

Let’s climb the mountain of interest paid on cash.

Savings accounts

Short-term to medium-term money is best parked in a savings account. It’s part of your strategy to get cash quickly and withdraw it again. In August last year, the average monthly interest rate for a traditional savings account at a branch bank was 0.43%. Last month it was 0.46%.

High-yield savings accounts pay more – Yahoo Finance lists APYs between 4.25% and 5.25% for high-yield savings accounts. You can see that rate shopping really pays off. (APY is the result of compounding your interest rate. Compounding periods may vary by bank.)

Money market accounts

A money market account will often increase your returns compared to a regular checking account, but you will likely need to deposit between $10,000 and $100,000 to receive the increase.

In August of last year, the national average monthly interest rate was 0.62%. A year later, it’s 0.64%. Consider putting your second source of funds in an above-average money market account. You want to have the money on hand, but you don’t want to close your checking account.

To do this, look for a high-interest money market account. As the Federal Reserve continues to cut interest rates, high-interest money market accounts will yield less. Yahoo Finance lists high-interest rates between 4.45% and 5.25%.

What to do now: Compare interest rates at banks, both locally and online. Keep your short-term cash flexible and secure the best possible interest rate.

Take care of your money

What Fed policy means for CDs

A low interest rate cycle would also impact CDs.

A 12-month CD was earning 1.76% monthly interest in August 2023. A year later, the same CD with the same term was earning 1.88%. The best CDs are around 5.25% APY. But remember, these rates were before the Fed cut rates. Next month, we’ll likely see a slow decline in interest rates. Plus, your minimum deposit and term will affect your interest rate.

What to do now: Use CDs to earn interest on your medium-term money. If interest rates fall, longer-term CDs may be your best option, while you use other easily accessible solutions for your short-term savings.

What the Fed’s latest move will mean for loans and mortgages

Now to the other side of the asset/liability balance. Here, lower interest rates can work to your advantage.

Personal Loans

According to the latest available data, personal loan rates have risen from 8.73% at the start of the Fed’s rate hikes in 2022 to 11.92% in May 2024.

Student loans

Most government loans have fixed interest rates, so Fed policy doesn’t affect them. Private student loans may have a variable interest rate, and Fed rate increases can be a factor.

To find out the interest rate on an existing loan, contact your lender or loan servicer.

Mortgage loans

If you’ve been looking to buy a home in the last two years, you know this story: Mortgage rates have skyrocketed. When the Fed started raising rates, 30-year fixed-rate mortgages were around 4%, according to Freddie Mac.

Last fall they soared to nearly 8%, but in late spring 30-year fixed-rate mortgage rates began to decline in anticipation of a rate cut and are now nearly 6%.

It took nearly 20 years for mortgage rates to fall from 7% in 2001 to an APR of under 3% in 2020. And homebuyers are unlikely to see lenders set mortgage rates that low again any time soon. The 50-year average for a 30-year fixed-rate mortgage is still well above 7%.

What to do now: As borrowing costs slowly decline, resist the temptation to take on more debt or extend the term of existing loans. Watch for upcoming mortgage refinancing opportunities.

Impact of Fed interest rate changes on credit cards

Credit card interest rates have risen from an average of just over 16% to well over 21% during the Federal Reserve’s rate hike cycle. With a potential shift to lower interest rates, we can look forward to lower fees on credit card balances.

However, relief will come gradually.

What to do now: Lower interest rates can give you the opportunity to pay off your credit card debt faster. Prioritize paying off the credit cards you can pay off – especially those with the highest interest rates – and consider balance transfers to lower-rate and interest-free credit card offers if your credit score allows it. If your credit score is good, a personal loan to consolidate credit card debt may be another option to consider.