6 Practical Strategies to Profit from the Fed’s Rate Cuts

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The Federal Reserve’s recent interest rate cuts are affecting everything from mortgages to investments, leaving many wondering, “what does the interest rate cut mean for me?” In this guide, we’ll explore 6 practical strategies to profit from the Fed’s rate cuts so you can make the most of these changes in your personal finances.

Key Takeaways

• Lower borrowing costs are great news if you’re looking to buy a home or finance big purchases, though refinancing may be a future strategy.
• Credit card rates might not fall immediately, so keep an eye on how your variable-rate cards adjust over time.
• Bond prices rise when rates fall, so it’s worth reviewing your investment strategy to see how you can benefit from this trend.
• The risk of inflation is low for now, but it’s worth watching how economic conditions change over time.

This interactive graph shows the Federal Funds Effective Rate from July 1, 1954 through September 1, 2024. On September 18, 2024, Jerome Powell, the chairman of the Fed, announced a benchmark policy rate cut of 50 basis points, or 0.50%. This lowered the policy rate to a 4.75% – 5.00% range, which is not reflected in the graph below.

Let’s explore what this interest rate cut means for you.

1. Mortgage Rates: Buy Now, Refinance Later?

While the Fed has cut rates, mortgage rates are still relatively high compared to previous years. So, it might not be the perfect moment to refinance. However, if you’re in the market to buy a home, it could be a smart move to lock in a rate now with the prospect of refinancing in the future if rates continue to fall. In fact, many homeowners refinance multiple times during rate-cutting cycles, taking advantage of lower rates each time to reduce their monthly payments even further.

While it’s tempting to wait until rates drop significantly, buying now could give you the flexibility to refinance not just once but potentially more than once as rates come down over the next few years.

2. Credit Card Interest Rates: Patience is Key

Credit card interest rates, especially for variable-rate cards, can be slow to react to Fed rate cuts. Even though the Fed has lowered rates, your card issuer may not pass those savings onto you right away. It’s essential to monitor your credit card statements and, if possible, pay down high-interest debt while rates are lower.

You could also consider transferring your balance to a card with a lower rate if the opportunity arises, but be mindful of any fees or restrictions that could outweigh the benefits.

3. Investments and Savings: Time to Rethink Your Strategy

When the Fed cuts rates, traditional savings accounts typically see lower returns. If you’ve been relying on interest from a savings account or certificate of deposit (CD), now might be the time to explore alternative investment strategies. Stock market investments can become more attractive since borrowing costs for businesses decrease, potentially boosting stock prices.

For a well-rounded portfolio, consider shifting some of your more conservative investments toward higher-yield opportunities. But remember: higher yield often means higher risk, so weigh your options carefully.

For more investment strategies, see Investments.

4. Investments and Bonds: A Rise in Bond Prices

One of the lesser-known effects of interest rate cuts is their impact on bond prices. When rates go down, bond prices generally go up. For example, let’s say you own a $1,000 bond that pays 5% interest. If the market interest rate drops to 4%, your bond becomes more attractive because it pays a higher interest rate than newly issued bonds. As a result, the price of your bond would increase, likely appreciating to around $1,111 to reflect the more favorable rate.

This can be an excellent opportunity to reassess your portfolio and consider how bonds fit into your overall strategy. While yields may decrease with falling rates, the appreciation in bond prices could offer a nice balance, especially in uncertain markets.

5. Consumer Spending: Easier to Borrow, But Should You?

As borrowing becomes cheaper, you might be tempted to take on more debt to finance big-ticket items like home renovations, cars, or vacations. Lower interest rates certainly make this more appealing, but it’s important to balance your short-term spending with long-term goals. Ask yourself whether the purchase is necessary and if it fits within your financial plan.

Lower borrowing costs might make now a good time to consider those larger purchases, but as always, prioritize your financial well-being over impulse decisions.

6. Inflation Concerns: A Low Risk for Now

You might have heard that lower interest rates can lead to inflation. The Fed typically raises rates to curb inflation when prices rise too fast, as higher borrowing costs reduce demand for goods and services. However, we’re currently in a period where inflation is close to the Fed’s target of 2%, so these recent rate cuts are unlikely to spark a surge in prices.

In fact, the Fed has weighed the risk of inflation against the possibility of rising unemployment. Keeping rates too high for too long could hurt economic growth and lead to job losses, so the Fed is betting that cutting rates now will help maintain stability without triggering a sharp increase in inflation.

If you’ve been holding off on big purchases like a car, now might be a good time to start shopping around, as prices could start to ease with these rate cuts.

Final Thoughts

The Fed’s rate cuts offer both opportunities and challenges for consumers and investors alike. By staying informed, you can make smarter choices about your mortgage, credit cards, investments, and spending. Whether you’re looking to buy a home with the prospect of refinancing later, adjusting your investment strategy to benefit from rising bond prices, or planning major purchases, understanding the impact of these rate cuts can help you stay ahead.

For more information on how Fed rate changes impact your finances, check out this Reuters article ↗.