The Fed just lowered interest rates: Why you should care

By The FedFOXBusiness

The potential impact of the Fed adopting a dovish tone

Sit Fixed Income Senior Vice President Bryce Doty on Federal Reserve policy and U.S. trade negotiations with China.

Good news for borrowers: The Federal Reserve lowered interest rates during its July policy-setting meeting.

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For the first time in more than a decade, policymakers at the U.S. central bank voted on Wednesday to cut the benchmark federal funds rate by 25 basis points, dropping it to a range between 2 percent and 2.25 percent.

But while that decision has been cheered by investors, what does it mean, exactly, for your own personal finances?

The interbank lending rate – which policymakers at the U.S. central bank voted to raise four times in 2018 – can affect consumers by increasing borrowing costs. That includes things like auto loan rates and 30-year-fixed mortgage rates; even a slightly lower rate for both can mean thousands of dollars in savings for consumers.

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For consumers, that can be both good and bad news, according to Curt Long, the chief economic and vice president of research at the National Association of Federally-Insured Credit Unions.

“It kind of depends on which side of the fence they’re on,” he said. “If you’re potentially going to be a borrower in the near future, the fact that the Fed seems determined to be patient, in their words, is probably good news. It means rates will probably stay lower than they would have otherwise. On the other hand, if you’re a saver, that might not be as good of news for you.”

That’s because some banks and credit unions will increase their savings rate during Fed hikes, making it a good chance for consumers – particularly retirees living off of their savings – to earn more.

The correlation isn’t quite so direct, however: The Fed raises the cost of borrowing for banks, which in turn passes that along to consumers. Congress tasked the central bank in 1977 with promoting “maximum employment, production and purchasing power” by keeping the cost of goods stable and creating solid labor-market conditions.

One of the most potent tools in the Fed’s arsenal includes interest rates. But Kevin Philip, Bel Air Investment Advisor's managing director, noted that the cut was so modest, it likely won't have a large impact on consumer's financial lives, in either direction -- though noted it was a good time to cut down on debt.

"Interest rates at some point will go higher, and it’s important to reduce in good times so as to not feel overburdened in leaner economic times," he said.

Typically, when policymakers are trying to spur additional consumer spending, they lower interest rates to reduce the cost of borrowing (during the financial recession in 2008, for instance, the Fed lowered it to effectively zero and did not raise it again until 2015). Conversely, to avoid inflation and cool the economy, it will raise rates to make it more expensive to borrow.

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Generally, the Fed tries to maintain a federal funds rate between 2 percent and 5 percent; it last raised rates in December, but essentially reversed that decision on Wednesday in the face of growing economic uncertainties – like the fallout from the U.S.-China trade war, concerns of slowing growth and Brexit.

Fed Chairman Jerome Powell said policymakers will continue to "act as appropriate" to sustain the record-long economic expansion, though stressed that the FOMC's decision was not part of a broader series of rate cuts.

"It's not the beginning of a long-series of rate cuts," he told reporters. "I didn't say it was just one, or anything like that."

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