What will happen when interest rates finally fall? (9 14 25)

Advertisement

Ready for cheaper loans and mortgages? Not so fast. When the Federal Reserve cuts interest rates, it's often a signal that something is wrong with the economy. Before you celebrate a rate cut, read our breakdown of why the Fed changes rates and what it could mean for your money, from your savings accounts to your credit card debt.

Here’s what we’re covering in today’s Clark Smart Investing newsletter:

• What will happen when interest rates finally fall?

• Is now the time to get a CD or a CD ladder?

• Understanding the biggest risk to new retirees

• What if you maxed out your 401(k)?

• Q&A: Do penny stocks ever pay off?

• Smart money move of the week: Check your savings account interest rate

💵 What Will Happen When Interest Rates Finally Fall?

When people hear that the Federal Reserve might cut interest rates, the first thought is usually, “Great, borrowing will get cheaper.” And that’s true — but it’s only part of the story.

The Fed doesn’t make these moves randomly. It adjusts rates to balance the health of the economy, and cuts usually signal that something is slowing down. To understand what could happen next, it helps to know where rates have been and why the Fed changes them in the first place.

A Brief History of Interest Rates

The federal funds rate, set by the Federal Open Market Committee, currently stands at 4.25%. This is the rate banks charge each other for overnight lending, and it serves as a baseline for many other interest rates in the economy. For savers, it’s a close approximation of what you can earn on your money with almost no risk, which is why today’s high-yield savings accounts pay rates that are very close to it.

During the Great Financial Crisis, the Fed slashed the rate to 0% in December 2008, where it stayed until December 2015 — seven years during which safe savings essentially earned nothing.

From there, rates climbed gradually, reaching 2.25% in December 2018. By March 2020, as the coronavirus pandemic hit, rates stood at 1.50% but were almost immediately cut back to 0%. They remained at that level until inflation surged in 2022, prompting the Fed to raise rates rapidly to a peak of 5.25% in July 2023 — the highest level since August 2007.

So what happens if the Fed cuts rates now? In the full article, we break down what it means for your savings, mortgage, credit cards, and loans — and the smart moves to make while rates are still high.

📚️ Recommended Reading

💬 Ask an Advisor

In this recurring Q&A, we share questions that have been answered by Clark Howard or Wes Moss on the podcast. Submit your question today!

John in Georgia asks: What are penny stocks? Do they ever pay off?

Wes Moss says: No. I don't know of anyone ever making real money in a penny stock. They are traded. They are out there. Typically a penny stock is anything under $5. Of course, some people have made some money. The problem is that there is a real lack of volume. Not a lot of shares traded. These things do go up in price but how do you sell with not a lot of volume.

💸 Money Tip of the Week

☎️ Need Money Help?

The Team Clark Consumer Action Center is a free helpline that can help you navigate your money questions. Call 636-492-5275. Visit clark.com/cac for more information.

Advertisement

Team Clark uses beehiiv to create and send our newsletters.