Federal Reserve Cuts Rates: What It Means for Your Money in 2025

Why the Fed cut rates

After hiking rates for 18 months straight, the Fed began its current rate-cutting path in September, encouraged by positive economic and employment data. 

According to the FOMC statement released on Dec. 18, the committee points to several factors that helped cement its decision: “labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective.” 

In mid-2022, inflation hit 9.1% — the highest level in nearly 40 years. To get a handle on the situation, the Fed began hiking rates aggressively. Higher rates lead to less consumer borrowing and spending, translating into lower demand for goods and services.

The Fed’s campaign was effective, pushing inflation steadily lower until it hit 2.5% in August 2024. This prompted the Fed to make the first of the latest three rate cuts. However, since then, the central bank’s preferred 12-month inflation metric crept back up to 2.7% in November.

Unemployment ticked up slightly in November to 4.2%, up from 4.1% the previous month. The unemployment rate is another gauge the central bank uses to decide whether to cut, pause or raise rates. 

At a press conference on Dec. 18, Federal Reserve Chair Jerome Powell had a very positive outlook on the economy: “We’re in a really good place. Our policy is in a really good place. I expect another good year next year.”

What the Fed’s move means for interest rates

The federal funds rate is the interest rate banks pay to borrow money. It’s also the foundation for the prime rate — the index rate that many financial products and loans are tied to. When the Fed rate changes, it can impact how much consumers pay to take out certain loans as well as the returns they earn on interest-earning products, such as CDs and savings accounts.

Here’s a look at how the Fed’s latest rate decision impacts your wallet:

Home equity lines of credit (HELOCs) and credit cards

Fed rate cuts directly impact short-term and variable-rate products like credit cards and HELOCs. 

“As that prime rate goes down with the Fed funds rate, that will have some immediate effect. But the reality is, the margin isn’t so much larger than the actual index that the impact for borrowers is going to be positive; you won’t have to pay as much interest,” says deRitis, noting the benefit will be “fairly muted.”

With HELOC rates moving lower in tandem with Fed rates and currently sitting well below 10%, it may be worth considering consolidating high-interest credit cards with annual percentage rates (APRs) north of 20% into a HELOC.

Savings account and CD rates

When the federal funds rate is cut, savings accounts and certificates of deposit (CD) rates fall, too. Savers see lower returns on their money, making these savings vehicles far less attractive.

Consumers might see better returns by putting extra cash into brokerage or retirement savings accounts during rate-cutting cycles.

Home loans 

When the Fed lowers rates, some people assume mortgage rates on 15- or 30-year fixed-rate loans will fall, too. But that’s not always the case.

“The 30-year fixed-rate mortgage really isn’t tied to the Fed funds rate, at least not directly,” deRitis says. “Therefore, we’re not expecting any impact there. In fact, the last time they cut, we actually saw the opposite effect: mortgage rates actually went up.”

Adjustable-rate mortgages (ARMs) tend to track the federal funds rate closely because of their variable rates after the loan’s initial fixed period ends. So when the Fed cuts rates, ARM borrowers can see their rates dip, too.

On the other hand, long-term mortgage rates don’t get the instant benefit of a federal funds rate cut. Instead, 15- and 30-year fixed rates see major movements based on housing market conditions, lender volume, the bond market and investment activity in mortgage-backed securities.

“A more cautious approach of Fed monetary easing will keep borrowing costs higher for longer across the economy,” First American Senior Economist Sam Williamson said in emailed comments. notes. “This includes mortgage rates, which are benchmarked to the 10-year Treasury yields and are expected to fall to the mid-to-low 6% range by the end of next year.”

He added that existing homeowners with ultra-low mortgage rates might remain locked into their current loans and homes, unwilling to sell. This “lock-in effect” means fewer homes on the market to meet the demand, adding to buyers’ affordability woes.

“While a drop in mortgage rates could potentially revitalize the housing market, the Fed’s gradual approach to easing means many homeowners will likely remain locked into their favorable rates, prolonging the market’s stagnation,” Williamson says.

Looking ahead to 2025

As policymakers and investors turn the page on 2024, there’s a lot of uncertainty in the market. Although the Fed initially forecasted four rate cuts in 2025, analysts are lowering their expectations to two or three cuts, at most.

“Our forecast, officially, is still calling for about two, maybe three cuts this year, and that’s based on this assumption that under current policy, inflation would continue to come down, but it’s kind of slow but steady progress back down to the 2% target,” deRitis says. 

He adds that it’s likely that the job market may slow down and “get back to more of an equilibrium.” That data, he explained, might cement the argument that the Fed’s monetary policy is too restrictive, making further rate cuts appropriate.

What the Fed does in 2025 mostly depends on the data in its widely anticipated quarterly update of its Summary of Economic Projections (SEP), Williamson says.

The latest dot plot data seems to confirm this forecast, with the Fed now anticipating two rate cuts in 2025, down from the four that were projected in September.

“Several committee members have suggested that slowing the pace of rate cuts is appropriate, given the recent outperformance of the U.S. economy and stalled progress on bringing down inflation,” Williamson says. “This includes a potential pause in January, with an 84% market-implied probability.”

The Fed chairman indicated that the central bank would be able to proceed more carefully with future reductions. “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive. We can therefore be more cautious as we consider further adjustments to our policy rate,” Powell says.