The wait may finally be over. Interest rate cuts are coming, Federal Reserve Chair Jerome Powell announced today.Â
"The time has come for policy to adjust," Powell said at the Fed's economic symposium in Jackson Hole, Wyoming. That's the strongest language he's publicly used since suggesting that a rate cut might be possible in September, following July's Federal Open Market Committee meeting.
The comments come more than eight months after the Fed first suggested it may cut the federal funds rate, which has remained at a target range of 5.25% to 5.50% since last summer. The Fed first began raising interest rates two years ago in an effort to bring down soaring inflation, which dropped below 3% annually for the first time since March 2021.Â
However, a cooling labor market has sparked concerns about a looming recession, with companies pulling back on hiring and borrowing costs remaining historically high. There's a lot to unpack ahead of the Fed's next meeting on Sept. 17-18. Let's dive in...Â
Will the Fed cut rates in September?
Powell did not specify when an interest rate cut is coming in his remarks on Friday, but most experts are expecting one in September. Some even consider that a little late.
"I think you can make a strong argument that the Fed should have cut rates in July, but being only six weeks late is very good by Fed standards," said Robert Fry, chief economist at Robert Fry Economics. He noted that many experts believe the Fed waited too long to begin raising rates when inflation first took off three years ago. Â
Why would the Fed cut interest rates now?
The potential cut comes as inflation has shown signs of cooling since this spring. And while it's not at the Fed's target rate of 2%, Powell expressed growing confidence that inflation is on a sustainable downward path.Â
But inflation is only half the equation. The Fed has two goals: maintain price stability and a strong job market. The latter has garnered more attention recently.Â
The latest job report indicated that the unemployment rate rose from 4.1% to 4.3% in July. While that number is still historically low, Powell noted that it's almost a full percentage point above where it was in early 2023. Â
"Most of that increase has come over the past six months," Powell said, suggesting that the job market's downturn is increasingly a concern.
How many rate cuts can we expect?
If the Fed makes a rate cut, the next questions are: how much and how often?Â
Fry predicts the Fed will lower rates by 0.25% next month. Although some optimistic prognosticators think a half-percent cut is on the table, Fry said that lowering rates too much and too soon may give the impression the Fed thinks the economy is weaker than expected. A lack of confidence could roil the stock market and further weaken the economy.Â
After its December meeting last year, the Fed suggested three rate cuts could happen in 2024. With three meetings left this year, in September, November and December, the Fed still has enough time to fulfill those predictions.
What should I do with my money in the meantime?
With interest rate cuts seeming more likely each day, consider how lower interest rates could affect your financial situation, and make plans now.
For savers, the Fed's cut means you'll likely earn a lower interest rate on your savings. Lock in rates for certificates of deposit and high-yield savings accounts while they're still high. Based on CNET's tracking, the best high-yield savings rate is still over 5%, which can yield a solid return.Â
On the flip side, borrowing rates are still high, and a single rate cut might not lower them significantly. So if you're taking on any new debt such as a car loan or mortgage, shop around for the lowest rate possible and consider refinancing when rates go down.Â
If you're paying off high-interest debt, such as a credit card balance, aim to pay more than the minimum payment to wipe out your debt faster and avoid interest charges. You may consider a balance transfer card with an introductory APR period to pay off your balance during a temporary reprieve from accruing interest. If you choose this route, create a plan to pay off as much debt as possible during this introductory period because when it ends, interest will begin accruing again.
