Biggest winners and losers from the Fed’s interest rate cut

The Federal Reserve announced that it’s lowering interest rates following its Dec. 17-18 meeting, dropping the federal funds rate by 25 basis points, to a target range of 4.25 to 4.5 percent.

It’s the third meeting in a row that the Fed has lowered rates, following a string of 11 rate hikes beginning in March 2022. With the worst of inflation seemingly under control – the annual rate coming in at 2.7 percent in November, after reaching the highest levels in decades at over 9 percent in mid-2022 – the Fed thinks it’s appropriate to ease financial conditions a bit further.

“The Federal Reserve is taking another step toward eventually getting benchmark interest rates back to a ‘neutral’ level that is neither an accelerator nor a brake on the economy,” says Greg McBride, CFA, Bankrate chief financial analyst.

“But with the economy motoring along and the progress on inflation having stalled out, this could be the last Fed rate cut for a few months, at least until they’re more comfortable with where inflation is headed,” says McBride.

At about 4.37 percent, the 10-year Treasury note is nearly even with where it was at the last Fed meeting in November. The benchmark rate is still much lower than the 4.99 percent it reached in October 2023.

Here are the winners and losers of the Fed’s latest rate decision.

1. Borrowers

If you’re an existing borrower and don’t need to tap the market for money – say, you previously locked in a 30-year fixed-rate mortgage in 2021 or 2022 – you’re in good shape. But even with falling rates, potential borrowers may not be able to access new credit, whether that’s credit cards (more later), student loans, personal loans, auto loans or whatever else you might need to borrow for.

The average interest rate on personal loans is 12.29 percent, as of Dec. 11, according to a Bankrate analysis, and the Fed’s rate decrease will put further downward pressure on those rates. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent, when the fed funds rate was near zero.

Besides these new borrowers, anyone with floating-rate debt is breathing a sigh of relief at the Fed’s decision. Still, you may have an older loan that’s resetting at this year’s higher rates. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates and it may be pushing up your monthly payment, just not as high as it would be if the Fed had not lowered rates.

2. Credit cards

Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. As the Fed sharply raised rates, rates on cards hit multi-decade highs. Now with the Fed lowering rates, interest on variable-rate cards should drop in line with this move and any upcoming ones.

“Cardholders will see their rates stair-step lower as the Fed continues to cut interest rates, but with a lag of as long as 90 days,” says McBride. “Credit card rates are coming off record highs and the Fed is cutting rates much more slowly than they increased, so don’t sit back and wait for lower interest rates.”

“You have to continue to be aggressive about paying down and paying off credit card debt, and utilizing a zero percent balance transfer offer can turbocharge your efforts,” he says.

(Here are some of the top balance-transfer cards to consider.)

Rates on credit cards are largely a non-issue if you’re not running an ongoing balance.

3. Mortgages

While the federal funds rate doesn’t really directly impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield falling through much of 2024, mortgage rates went along for the ride. But things changed once the Fed started trimming rates.

“Mortgage rates have gone up – not down – since the Fed began cutting interest rates in September,” says McBride. “Stubborn inflation and the prospect for fewer rate cuts in 2025 has renewed the move higher in both long-term bond yields and mortgage rates.”

Mortgage rates remain well above where they were three or four years ago, and this – following the rapid rise in housing prices over the recent past – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.

The cost of a home equity line of credit (HELOC) should decline since HELOCs stay aligned with changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers. Those with outstanding balances on their HELOC will likely see rates stay close to where they are currently, but it can still be a good time to shop around for the best rate.

4. Stock and bond investors

Low rates are typically beneficial for stocks, making them look like a more attractive investment in comparison to bonds and fixed-income investments such as CDs. Low rates are also generally a positive for holders of bonds, whose prices rise with lower rates.

“Another interest rate cut is welcomed by stock investors, especially when coupled with the ongoing strength in the economy, growth in corporate earnings and optimism for a favorable backdrop in 2025,” says McBride. “With the stock market near record highs and speculation rampant, it is hard to argue that Fed policy is restrictive.”

Over the past couple of years, higher rates hit bonds hard — and the longer the bond’s maturity, the more it was stung by rising rates. As rates fell, fixed-income investors benefited as bond prices moved higher. In the last three months, though, longer-term rates have moved higher.

“At first blush, another rate cut would seem a positive for bond prices,” says McBride. “But concerns about inflation haven’t gone away and there are worries it may flare up again in 2025. This is why we’re seeing short-term bond yields follow the Fed lower at the same time intermediate- and long-term bond yields have been on the rise.”

Short-term rates remain attractive if you’re looking for a safe place to stash money while waiting for things to cool off.

“Be sure to match maturity to your time horizon as an unexpected rise in yields can deal you an unpleasant hit to the price if you need to sell prior to maturity,” says McBride.

5. Savings accounts and CDs

The Fed’s rate cut means that banks will lower rates on their savings, CDs and money market accounts, though many have already been actively paring them back in anticipation of the Fed lowering rates.

“The bad news is that the Fed’s rate cuts are bringing yields on savings accounts and CDs down from the 5 percent levels we’d come to enjoy,” says McBride. “The good news is that the top-yielding offers still well outpace inflation, and with the Fed poised to move slowly in early 2025, the inflation-beating yields will persist well into next year.”

Savers looking to maximize their earnings from interest should consider turning to online banks or the top credit unions, where rates are typically much better than those offered by traditional banks.

When it comes to CDs, account holders who recently locked in rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.

With rates likely to fall from here, it may be a good time to lock in longer maturities on CDs, especially those in the 2-year to 5-year timeframe while they remain relatively high.

6. The U.S. federal government

With the national debt above $36 trillion, a decline in rates will at least temporarily relieve some pressure on the short-term borrowing costs of the federal government as it rolls over debt and borrows new money. That said, the government’s total borrowing costs have been rising as older debts at lower rates must be rolled over at today’s higher interest rates.

Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower over the long term.

As long as inflation remained higher than interest rates, the government was slowly taking advantage of inflation, paying down prior debts with less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt. Now, with interest rates higher than inflation, the tables have turned, and the government is repaying debt with today’s more costly dollars.

While the Fed is moving short-term rates lower, the rate on 10-year Treasurys has rallied in the last few months, and longer rates jumped much higher on the day after Donald Trump won the 2024 U.S. presidential election, raising the costs of longer-term borrowing.

Bottom line

With inflation well off its peak levels, the Fed has decided to lower interest rates. Smart consumers can take advantage, for example, by being more discriminating when it comes to shopping for rates on savings accounts or CDs. It can still be a good time to lock in longer-term rates on CDs or even get a good balance-transfer credit card.