At Experian, one of our priorities is consumer credit and finance education. This post may contain links and references to one or more of our partners, but we provide an objective view to help you make the best decisions. For more information, see our Editorial Policy.
In this article:
The Federal Reserve's federal funds rate is used to help manage economic growth and inflation. In 2022 and 2023, the rate was hiked several times, resulting in more expensive debt and more lucrative savings rates.
But in 2024, the Fed started slashing the rate following positive inflation data, with three rate cuts in the final months of the year. Further rate reductions in 2025 and beyond could have both positive and negative effects on your finances, though the actual impact will depend on your particular situation. Here's what you need to know.
What Are the Fed Interest Rate Projections for 2025?
The Federal Open Market Committee (FOMC) raised the federal funds rate 11 times between March 2022 and July 2023. Since then, the committee held the rate steady at a range of 5.25% to 5.5% for more than a year.
In three consecutive meetings at the end of 2024, however, the committee slashed the rate three times, resulting in a range of 4.25% to 4.5% at the end of the year.
While more rate cuts in 2025 are expected, many experts forecast that the pace will slow down. Although the inflation rate has come down considerably since its 40-year high in 2022, its progress toward a 2% target rate has stalled in recent months.
According to CME FedWatch, which tracks the probabilities of Fed rate changes, the most likely range by the end of 2025 is the current range. These are all just projections, however. The FOMC's decisions will ultimately depend on current and projected economic data.
How Fed Rate Reductions Impact Borrowing
Banks use the federal funds rate to determine how much to charge other banks when lending money to meet overnight reserve requirements.
As a result, the rate directly influences the prime rate, which banks and other lenders use to determine interest rates for a variety of loans, including both installment loans and revolving lines of credit. Here are some of the borrowing methods most affected by changes to the Fed rate.
Mortgages
The starting rate for a fixed-rate mortgage or adjustable-rate mortgage may be indirectly influenced by the federal funds rate. However, they're more affected by the 10-year Treasury note yield, which is impacted by inflation and other economic conditions.
If you have a fixed-rate mortgage, your rate will remain unchanged for the life of the loan, regardless of what happens to market rates.
In contrast, if you have an adjustable-rate loan, your interest rate changes regularly based on market conditions. As a result, you'll likely benefit from each rate reduction with a corresponding decrease in your loan's interest rate.
Auto Loans
Auto loans typically have a fixed interest rate, which means that auto loan rates for new borrowers may decrease over the next few months as they catch up to the Fed rate. However, existing borrowers will need to refinance their loans to take advantage of lower interest rates.
Personal Loans
As with auto loans, personal loans tend to have fixed interest rates—though they're usually higher because most personal loans are unsecured.
So, if you're looking to take out a personal loan to consolidate high-interest debt, pay for home renovations, cover medical expenses or anything else, you may expect interest rates on new loans to decline in the short term. However, if you have an existing personal loan, your rate won't change.
Credit Cards
Virtually all credit cards have a variable interest rate, which is determined in part by the prevailing prime rate. So, it's no wonder that recent Fed rate hikes have helped contribute to record-high credit card interest rates in 2024.
You may get some relief if the FOMC continues to slash its interest rate, though it may take one to two months after a Fed decision to see your credit card's annual percentage rate (APR) drop.
How Fed Rate Reductions Impact Savings
Banks use customer deposits to fund their loans, and because banks and other lenders are earning more from higher loan interest rates, they may also offer higher interest rates on savings products to encourage more deposits.
However, each financial institution has a different process for determining its savings rates, so the impact of rate reductions will depend on your bank and the type of account.
Traditional Savings Account
Banks that offer traditional savings accounts typically don't offer much higher rates when the Fed rate is high. As a result, your rate likely won't go down by much if the FOMC continues to cut rates.
High-Yield Savings Account
Banks that offer high-yield savings accounts offer annual percentage yields (APYs) that are much higher than what you can get with a traditional savings account.
For context, the national average savings rate was 0.43% in December 2024, according to the Federal Deposit Insurance Corp. (FDIC). But some of the best high-yield savings accounts offered APYs exceeding 4% or even 4.5%.
Because these accounts offer variable rates, however, you may start to see your APY decline or stay the same, depending on the FOMC's decisions.
Certificates of Deposit
Certificates of deposit (CDs) offer a fixed interest rate instead of a variable one, which means that your APY will remain the same for your chosen term, which can range from one month to several years. CD rates tend to be higher than savings account rates.
Once the FOMC starts cutting its rate, you can expect APYs for new CDs to start declining. However, if you open a CD before the first rate cut, your fixed rate won't be impacted—though you may get a lower rate when it's time to renew the account at the end of your term, especially if it's a longer-term CD.
How to Minimize the Negative Impact of Fed Rate Reductions
If you have some flexibility with your financial plan, there are some steps you can take to enjoy the benefits of Fed rate reductions while also minimizing the drawbacks. Options include:
- Hold off on borrowing until interest rates start to decline.
- Look into refinancing existing fixed-rate loans at a lower interest rate.
- Switch to a high-yield savings account to take advantage of higher APYs while you can.
- Consider putting some money in a CD to enjoy a high fixed APY for longer.
If you have credit card debt, rate cuts likely won't save you a lot of money on interest charges, so it's best to work on paying off your debt to minimize its impact on your wallet.
The Bottom Line
Although economic conditions can influence loan and credit card interest rates, your creditworthiness also has a major impact on your ability to get favorable credit terms. Check your credit score and credit report to evaluate your overall credit health, and consider whether you can take steps to improve your credit score before applying for a loan or credit card.