Over the past few years, the Federal Reserve (the Fed) has been trying to combat inflation by raising interest rates. These rate hikes have influenced everything from mortgages to credit cards, making borrowing more expensive while rewarding savers with higher returns on savings accounts and CDs. As inflation is slowing and there are signs of the economy stabilizing, the Fed is expected to continue to lower rates. Many news sources, including Reuters, have reported expected rate cuts.

For our credit union members and other consumers, this shift can significantly impact personal finances. Preparing your finances ahead of Fed rate cuts is crucial to ensure you can take full advantage of the changes. This blog will discuss why the Fed raises and lowers rates, what a rate cut means for your money, and the smart financial moves you should consider to capitalize on the expected change.

Why Does the Fed Raise and Lower Rates?

The Federal Reserve’s primary goal is to maintain economic stability. One of its key tools in doing so is managing interest rates. When inflation starts to rise too quickly or the economy overheats, the Fed raises interest rates to cool things down. The logic is simple: higher borrowing costs tend to slow down spending and investment, which, in turn, slows down inflation.

Over the past couple of years, we’ve seen this approach in action. With the pandemic’s economic aftermath, global supply chain disruptions, and massive fiscal stimulus, inflation surged to levels not seen in decades. The Fed embarked on a series of aggressive rate hikes to curb this. This made borrowing—whether for homes, cars, or credit cards—more expensive, while also offering higher returns on savings accounts and other low-risk savings vehicles.

However, raising rates can also negatively impact growth. When businesses and consumers cut back on spending due to higher borrowing costs, economic activity can slow down. Now that inflation shows signs of slowing, the Fed is considering reducing rates further to stimulate the economy and ensure growth doesn’t stall.

Why Are We Expecting Fed Rate Cuts?

Fed rate cuts could potentially bring some positive changes to your financial landscape.

Two factors indicate that more rate cuts could be on the horizon:

  1. Declining Inflation: After peaking in recent years, inflation rates have been slowly decreasing, thanks partly to the Fed’s rate hikes. With inflation appearing to be under control, the Fed may need to continue to reduce rates to support more robust economic growth.
  2. Slowing Economic Growth: Higher interest rates can dampen consumer spending and business investment. The U.S. economy has shown some signs of slowing, and rate cuts could help stimulate activity by making borrowing more affordable again.

Smart Money Moves to Prepare for Fed Rate Cuts

Once you understand that Fed rate cuts are possible, it’s time to start thinking about how they will affect your finances. Here are some actionable steps you can take to prepare:

1 Refinance High-Interest Debt

When the Fed lowers interest rates, borrowing costs decrease, which can be an excellent opportunity to refinance existing debt. For example, if you have a mortgage, home equity, personal, or car loan with higher interest rates, refinancing them with your credit union in a rate cut environment can significantly reduce your monthly payments and total interest costs.

What to do:

  • It’s essential to keep a close eye on interest rates and compare various refinancing options. You can start by checking Guthrie Community Credit Union’s current loan rates. If you’ve been holding off on refinancing, a rate cut environment could be the time to act.
  • Check your credit score and improve it if necessary to qualify for the best rates.

2 Lock in a Lower Mortgage Rate

If you plan to buy a home or refinance an existing mortgage, Fed rate cuts can work in your favor. Lower interest rates on home loans mean lower monthly payments and reduced interest costs over the life of the loan. Rate cuts could provide the perfect opportunity to lock in a lower fixed-rate mortgage.

What to do:

For homeowners, it’s advisable to seek guidance from a mortgage advisor to explore your refinancing options.

3 Reevaluate Your Savings Strategy

While rate cuts are great for borrowers, they are less favorable for savers. When the Fed lowers rates, the interest earned on savings accounts, CDs, and other low-risk investments also tends to drop. If your savings are in accounts with variable interest rates, a rate cut could reduce your returns.

What to do:

  • Consider moving some of your savings to fixed-rate products like a Guthrie Share Certificate before rates drop. Terms range from 90 days to 5 years.
  • Explore alternative low-risk investments with your financial advisor.
  • Stay informed about credit union promotions or special offers that may continue to offer higher-than-average rates.

4 Plan for Larger Purchases

Don’t wait for further Fed rate cuts to make your move. Start planning for larger purchases that may require financing, such as a new vehicle or home improvement project. This proactive approach will ensure you’re ready to seize the opportunity when it arises.

If you’ve been delaying a major purchase, such as buying a car or financing a home renovation, Fed rate cuts could be the ideal time to act. Lower interest rates make financing larger purchases more affordable, allowing you to spread out payments without paying excessive interest.

What to do:

  • Start planning for large purchases that may require financing, such as a new vehicle or home improvement project.
  • Compare loan options from different lenders to find the most favorable terms as rates decline. Be sure to include Guthrie Community Credit Union loan rates in your comparison.

5 Keep an Eye on Inflation

While rate cuts can spur economic growth, they can also reignite inflationary pressures if the economy overheats again. This means that the cost of goods and services could rise even as interest rates drop. Stay mindful of inflation’s potential resurgence and adjust your budget accordingly.

What to do:

  • Build a flexible budget that allows for inflationary changes in prices.
  • Focus on paying down high-interest debt to free up cash flow incase inflation increases. A Guthrie CCU balance transfer credit card may be able to help.

6 Review Your Investment Strategy

Lower interest rates can impact the broader economy. While this blog focuses on personal finance rather than the stock market, it’s important to remember that your long-term investments, such as retirement accounts, may be affected.

What to do:

  • Consider consulting a financial advisor to see how Fed rate cuts might affect your investment portfolio.
  • Adjust your risk tolerance and rebalance your portfolio if necessary to align with the changing economic environment.

Smart Money Moves to Prepare for Fed Rate Cuts

Fed rate cuts can have wide-reaching implications for your personal finances, from borrowing costs to savings rates. By staying informed and making strategic financial moves, you can position yourself to benefit from the opportunities a lower-rate environment offers. Whether it’s refinancing high-interest debt, locking in a low mortgage rate, or adjusting your savings strategy, preparing now will help you maximize the financial advantages of Fed rate cuts.

Disclaimer

The information on this website is provided for general informational purposes only and is not intended as financial advice or a recommendation. It should not be relied upon for making financial decisions. We strongly advise consulting with a professional financial advisor before taking any action based on this content. We do not guarantee the accuracy, completeness, or usefulness of this information and will not be liable for any loss or damage resulting from your reliance on it. Use of this site constitutes acceptance of this disclaimer.