The Federal Reserve and Interest Rates

By: Griffin Bettencourt, Private Banking Officer
September 2024

For the first time in over 36 months the federal rate has been cut. As a consumer or business owner, how does this rate reduction impact you? It's crucial to grasp how federal rate reductions influence our financial lives. 

These rate cuts can significantly affect mortgage rates, savings, investments, consumer borrowing, the housing market, and inflation. This article delves into these areas to provide a comprehensive understanding of how federal rate reductions impact consumers.

As your local banker, I am available to help you understand the nuances of the banking world and help you navigate through your financial journey.

How a Federal Rate Cut Affects Mortgage Rates

Federal rate cuts directly impact mortgage rates due to the relationship between overall economic conditions and borrowing costs. When the Federal Reserve implements a federal interest rate reduction, banks and lending institutions often follow suit, resulting in decreased mortgage rates.

Homeowners and prospective buyers can benefit from these lower rates. Those seeking new mortgages or looking to refinance existing ones can secure loans at reduced rates, leading to substantial savings over the mortgage's life. Lower interest rates translate into lower monthly payments, freeing up funds for other expenses or savings.

Our mortgage officers are available to help you navigate your mortgage and home finances and to answer any questions you may have. 

The Effect of Federal Rate Reduction on Savings and Investments

Lower interest rates significantly impact savings accounts and certificates of deposit (CDs). When the Federal Reserve implements a federal rate reduction, banks and financial institutions typically lower the interest rates offered on savings accounts and CDs, affecting their growth potential.

This can be frustrating for individuals relying on these accounts to grow their wealth, as lower rates result in slower fund accumulation and reduced income. It’s essential to reconsider savings strategies in light of these changes.

However, a federal interest rate reduction can also present opportunities for investors. Reduced borrowing costs can stimulate economic growth, potentially leading to higher returns in specific sectors. Investors should evaluate market conditions and identify sectors poised to benefit from rate reductions, such as real estate, construction, and manufacturing, to capitalize on growth opportunities.

Retirees and income-focused investors should carefully consider the impact of rate reductions on their investment income. Lower interest rates mean reduced returns from fixed-income investments like bonds and annuities, potentially affecting income levels.

To mitigate these effects, diversifying portfolios with dividend-paying stocks, real estate investment trusts (REITs), or other income-generating assets can help supplement income and offset the impact of rate reductions.

Our Towne Wealth Management advisors are available to review portfolio performance and answer any questions you may have.