What Falling Interest Rates Could Mean to You and the Economy

What Falling Interest Rates Could Mean to You and the Economy

Headlines across the U.S. touted welcome relief for consumers when the Federal Reserve cut the federal funds rate in September 2024 for the first time since the start of the pandemic in March 2020. The cut of a half percentage point signaled an aggressive start to lowering interest rates that continued with quarter-point cuts in each of November and December. The Federal Reserve’s goal? Stimulating economic and employment growth.

Think about it: When interest rates are lower, consumers and business owners can borrow money at a lower rate. That can make it more affordable to buy cars, homes, business equipment and other big-ticket items that require a loan. If you’ve been holding off on a large purchase because interest rates were too high, you’re not alone. Many consumers and business owners have been waiting for this moment, when lower interest rates help put homebuying, business expansion and other important goals back within reach.

More affordable borrowing

While lenders are not required to adjust their rates in lockstep with Federal Reserve actions, many do. In fact, if you have any variable-rate loans or lines of credit — an adjustable rate mortgage (ARM), home equity line of credit or variable-rate personal loan, for example — or outstanding credit card balances, you may have already seen reductions in your monthly payments due to recent interest rate cuts. Variable rates automatically fluctuate with the ups and downs of the financial indexes they are tied to (such as the federal funds rate).

Fixed-rate loan payments do not fluctuate. That can be great if you locked in a loan when interest rates were low. If you took out a loan in the past couple of years, though, it’s worth rechecking its interest rate to see if refinancing may be a good, viable option for you. When rates drop 1% to 1.5% lower than the current rate of your fixed-rate mortgage, for instance, refinancing could potentially save you money. Factors to keep in mind as you consider whether to refinance include the total cost of the mortgage, how long it will take to recoup those costs and how long you plan to stay in the house. Dollar Bank’s “Time to Refinance?” calculator can help you compare your current payment with that of a new, lower-interest mortgage.

The lower-interest-rate environment may also spur you to consider refinancing, through a fixed-rate loan, to consolidate any high-interest or variable-rate debt you may have. Locking in a rate that’s relatively low ensures your payment won’t increase should interest rates begin to climb again. Keep in mind that lenders have the discretion to take other factors, such as your credit history, into account when they set the interest rate for your loan.

Optimistic business leaders and investors

Lower borrowing costs can also stimulate the economy by urging business owners to invest in expansion, whether that entails new office buildings, equipment purchases, technology adoption or new hiring initiatives. One of the primary reasons the Federal Reserve reduces interest rates is to revitalize the labor market; optimistic business leaders look at hiring new employees as a great way to grow their companies. That’s good news for job seekers, who appreciate the new opportunities to advance their careers.

Financial markets often get a boost from lower interest rates, too, as the outlook for corporate profitability and economic growth improves. Against this backdrop, many investors view rate cuts as positive and invest more aggressively, which can drive up stock prices and elevate market sentiment.

Potentially lower returns on savings

Reductions in the federal funds rate are causing some financial institutions to reduce the percentage of interest they pay depositors on their savings accounts and certificates of deposit (CDs). Remember, although yields may not be quite as high as they were when interest rates were higher, savings accounts and CDs continue to be a safe place for your money to grow. This is a good time to revisit your savings goals and make sure you’re on track. Dollar Bank offers a variety of savings options to support your savings strategy.

What to expect in 2025

While interest rates are not expected to plunge to the historic lows of 2020, when the Federal Reserve took dramatic steps to keep credit flowing during the pandemic, many financial experts believe rates will continue a gradual decline throughout 2025 and into 2026. The Mortgage Bankers Association, for example, sees mortgage rates ending 2024 around 6.60%, trending downward to 6.40% by the end of 2025, and decreasing further, to 6.30%, in 2026.

However, the Federal Reserve’s actions are likely to be influenced by a range of variable factors in 2025, including the impacts of the economic policies of the incoming Trump administration. Time will tell whether rates will continue to fall or simply stabilize, or if they may begin rising again.

If you’d like to discuss opportunities for making the most of today’s interest rates, schedule an appointment at your local Dollar Bank office or call us at 1-800-242-2265.