The Federal Reserve cut its key interest rate by a quarter point at its final meeting of the year.
The December move marked the third consecutive time the central bank has cut interest rates, bringing the federal funds rate down three-quarters of a point since September to a range of 3.5% to 3.75%.
The cuts could impact many of the loan and savings rates consumers see every day.
Although the federal funds rate, set by the Federal Open Market Committee, is the rate at which banks borrow and lend to each other overnight, rather than the rate consumers pay, the Fed's actions still impact many types of consumer goods.
Many short-term consumer interest rates are closely tied to the prime rate, which is typically 3 percentage points higher than the federal funds rate. Longer-term interest rates are also influenced by inflation and other economic factors.
From credit cards and car loans to mortgage rates, student loans and savings accounts, here's a look at how the Fed's rate cut could affect your finances.
The Fed's Influence on Credit Card APRs
Most Americans have at least one credit card and the majority of cardholders carry a monthly balance, meaning they will likely pay around 20% interest per year on these short-term loans.
However, because credit cards have a variable interest rate, there is a direct connection to the Fed's benchmark. When interest rates go down, the prime rate drops and the interest rate on your credit card debt should follow within one or two billing cycles.
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According to Matt Schulz, chief credit analyst at LendingTree, a quarter-point change doesn't mean much when credit card APRs are sky-high, but the collective effect of successive cuts could make a noticeable difference, especially compared to last year's record rates.
“The cuts could mean hundreds of dollars in savings for debtors,” he said.
Less impact on mortgage interest rates
Mortgages are the largest debt burden for most Americans, but these longer-term loans are less impacted by the Fed. Both 15- and 30-year mortgage rates are more closely tied to Treasury yields and the economy.
As the 10-year Treasury yield continues to rise amid concerns about continued inflation, the average interest rate on a 30-year fixed-rate mortgage has also increased slightly and is currently around 6.35%, according to Mortgage News Daily on Dec. 9.
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“Given that mortgages are measured by 10-year yields, if the stock market and investors react, we could very well see a rise in mortgage rates after a cut,” said Brett House, an economics professor at Columbia Business School.
However, because most people have fixed-rate mortgages, their interest rate won't change unless they refinance or sell their home and buy another property.
Other home loans are more closely tied to the Fed's actions. Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are tied to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts immediately, so borrowers may see lower interest rates.
New car loans could change with a rate cut
In addition to mortgages and credit card debt, car loans also make up a significant portion of household budgets. But auto loan interest rates are fixed and do not adjust based on the Fed's rate cut.
Still, buyers looking to buy a car could benefit if prices continue to fall. According to Edmunds, the average auto loan rate for a new car is now down to 6.6%.
And yet, “Car buyers still face a challenging market, as evidenced by record-high monthly payments and record loan balances on financed new vehicle purchases,” said Joseph Yoon, consumer insights analyst at Edmunds.
According to Edmunds, the average monthly payment for a new vehicle reached an all-time high of $772, even though the average annual percentage rate (APR) for a new vehicle fell in November. The average amount financed for a new car also reached a new record of almost $44,000.
Federal student loans only reset once a year
At a time when many student loan borrowers are struggling to repay, interest rate cuts won't provide much relief. Federal interest rates on student loans are also set for the life of the loan and adjusted annually for new loans based on the May 10-year Treasury note auction.
However, if you have a personal loan, these loans can be fixed or have a variable interest rate tied to the Treasury bill or other interest rates. As the Fed cuts interest rates, interest rates on these private student loans will decline over a period of one or three months, depending on the benchmark, according to higher education expert Mark Kantrowitz.
Still, a 25 basis point cut would reduce monthly loan payments on a 10-year, $10,000 loan by about $1.25 per month, Kantrowitz said. “Multiply these numbers by three if you also take into account the two previous rate cuts,” he added. “It won’t cover the cost of a cup of coffee.”
Savings interest rates fall when the Fed cuts interest rates
It's more important than ever for savers to take matters into their own hands. While the central bank does not have a direct influence on deposit rates, returns tend to correlate with changes in the target federal funds rate.
Following the Fed's previous rate cuts, interest rates on highest-yielding online savings accounts have fallen to around 4% from just under 5% a year ago, according to Bankrate.
“Savings rates will go down,” said Stephen Kates, a certified financial planner and financial analyst at Bankrate.
“If you have a high-yield savings account and want or need a certain return, you have to stay tuned,” he said.
That could mean having to secure a certificate of deposit with a longer term, he advised. One-year CDs pay an average of 1.93%, but the highest-yielding CD rates pay more than 4%, according to Bankrate.
“If you find that you’re not keeping up with inflation, it’s absolutely time to do something,” Kates said.
The impact of a new Fed chair
Wednesday's Fed decision also comes under pressure from President Donald Trump, who has repeatedly argued that interest rates should be significantly lower, suggesting that doing so would make it easier for businesses and consumers to borrow and stimulate the economy.
Trump has indicated he may choose National Economic Council Director Kevin Hassett to replace Fed Chairman Jerome Powell in 2026. Hassett is believed to be in favor of further rate cuts, although he has also said he will not bow to political pressure.
“Consumers who have been deferring borrowing may find this environment more favorable,” said Michele Raneri, vice president and head of U.S. research and advisory at TransUnion. “Lower borrowing costs can ease household budgets, ease inflationary pressures and reduce financial stress.”
However, if the Fed further eases monetary policy next year, that is no guarantee of lower borrowing costs across the board.
“It is likely that a loose Fed chairmanship would cause yields to rise rather than fall over the medium and longer term because it suggests they are less likely to get inflation under control,” the House of Representatives told Columbia Business School.
“It is not obvious that this economy needs further stimulus in the form of a rate cut from the Fed,” he said. “It’s not an absolute necessity, especially when inflation is still high.”
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