By: Kara Perez
Updated: September 11, 2019
On July 31, 2019, the Federal Reserve cut rates for the first time in 11 years. So now what? What does this mean for you and your money?
A rate cut means that several major types of interest rates will go down. The hope is that the decrease in interest payments means more money for Americans to save and spend.
Will this affect the way you save and invest? There’s a lot to unpack with a rate cut, so let’s examine it from all angles.
Why Did a Rate Cut Happen?
After raising interest rates for the last decade, a rate cut comes an unsurprising yet bold move by the Fed. The last time it cut interest rates was just before the Great Recession. The rate cut was intended to help Americans have more money to themselves, ideally to build savings and lower monthly debt payments.
This new cut comes when the U.S. economy is in a much stronger place than in 2007–2008. There has been talk for the past four months that a rate cut was coming. But there was also no economic sign demanding a rate cut. So why bother to cut the rates?
While the Federal Reserve operates as an independent body from the government, President Trump has been calling for a rate cut for months on end. It’s the president’s opinion that a rate cut will further stimulate the economy, encouraging people to spend money.
The U.S. continues to be in the longest bull market ever. More and more experts are warning of a crash to come. No one can predict when a recession will happen. But a bull market of over nine years (like the one we’re currently in) will have to end at some point.
Experts think the time will be sooner rather than later, what with the U.S. being in a trade war with China, the bond yield inverting in August 2019, and worldwide economic slowdowns.
So the Fed cut rates as a way to hopefully ward off any downturn in the economy. The hope is that interest rate cuts means more money in the average American’s hands and could bring opportunities to boost savings and investments. It’s also a sign from the Fed that it believes the economy is still going strong and can handle a rate cut.
How You Should Consider Investing Right Now
Speaking of investments, how should you be investing now that rates are down? Here’s how it affects four different types of investing and saving.
Real Estate Investing
Lower federal interest rates translate into lower adjustable rate mortgages (ARM) and home equity lines of credit (HELOC). (Fixed rate mortgages aren’t affected by this rate change.)
If you have an ARM or HELOC already, you may see a favorable rate change, meaning you pay slightly less.
If you don’t currently have either of these types of loans, now may be a good time to look into it. The Fed is also signaling that it may continue with interest cuts as soon as September 2019. So now is a great time to take advantage of paying less for a home.
Credit Card Interest
55% of Americans have credit card debt. But credit cards are notorious for having some of the highest interest rates around. The Fed rate cut means that you may see your interest rate go down on your credit cards.
This is not a reason to rack up more debt! A lower credit card interest rate is a great chance to make your payments go farther and get yourself out of debt. Since credit card debt is revolving debt, it’s one of the hardest to get out of. See if you can make extra payments in the coming months and do yourself the favor of becoming debt free.
Savings Accounts and CDs
Unfortunately, you may also see your interest rate on your savings account go down with these cuts. This is one instance where you’re simply losing a little bit of money. These rate cuts will affect only the high-yield savings accounts. Most banks have their savings account interest rates at 0.01% and 0.02%, so you’re unlikely to see a cut there.
However, if you keep your money in a high-yield account where the interest rate has been in the 2–3% range, you can expect a drop in that rate. This also applies to certificates of deposit (CDs). so expect your bank to restructure their CD interest rates.
This drop is unfortunate, but again, not a reason to stop saving money. Cash is still king for many reasons. Aim to have at least three months of living expenses stashed away.
The U.S. is still also seeing low inflation. This means that the drop in interest rates doesn’t necessarily mean that you will lose money by keeping it in savings.
The Stock Market
No stock is ever a sure bet, and no one is sure when a recession will come or what it will look like. All that said, now is a good time to get really strategic with your investments.
How far are you from retirement and needing to live off your investments? If you’ve got 25-plus years, you can probably afford to be more aggressive with your holdings and to go for a higher rate of return. Make sure to diversify your holdings and buy into funds that have low fees.
The Bottom Line
The change to our interest rates definitely means now is a good time to do some financial housekeeping.
Check out your interest rates across all your accounts. Make sure you understand any rate drops that affect you personally. And make a plan to get out of debt and build your savings. Now may also be a good time to get into the real estate to take advantage of these falling rates.
Finally, examine your current stock market investments and make sure you’re on track to hit your goals. If not, figure out a way to get you there in this new economic environment.