I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your Wallet

Throughout 2025, the Federal Reserve has kept interest rates steady after cutting them by a full percentage point in 2024. But signs are emerging that change may be on the horizon.

Inflation appears to be cooling, the job market is showing signs of softening, and at the August Jackson Hole, Wyoming, conference, Fed Chair Jerome Powell indicated that rate cuts could be on the table in upcoming meetings.

So why does this matter?

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The Fed's goal is to keep the economy balanced — not too hot, not too cold. Think of it like Goldilocks' porridge: just right. The key tool it uses is the fed funds rate, which influences how much banks charge each other for overnight loans.

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This rate affects a wide range of borrowing costs, from credit cards to mortgages, but it primarily targets short-term interest rates.

Longer-term rates, like those on five- or 10-year loans, are shaped by more than just Fed policy. They reflect expectations about future short-term rates, inflation and market demand.

So, a rate cut doesn't automatically mean lower long-term borrowing costs.

Given that it looks highly likely that the Fed will lower rates in the near future, it's worth considering who would benefit from lower rates, who is hurt by them, and what to do if rates are going down.

Who benefits from lower rates?

Theoretically, anyone who is looking to borrow money benefits from lower rates, but due to the nature of the yield curve (the interest rate for different lengths of borrowing), not all borrowers benefit equally.

The type of debt that is most directly affected is variable rate debt with rapid resets. Things that tend to fall into this category are home equity lines of credit (HELOCs) and credit cards on the consumer side and floating-rate loans the corporate side.

Adjustable-rate mortgages also benefit from lower rates, but after the financial crisis, their use plummeted and are fairly uncommon today.

While it is always nice to get a break when a 27.5% credit card interest rate moves to a 26.5% rate, assuming the Fed eventually implements a cut of 1 percentage point, that probably won't help many people.

Arguably, the same is true for things like home equity lines, which tend to carry higher interest than mortgages.

More affordable housing via lower rates is often cited as a reason rates need to be cut now, and home sales are at a nadir in this high-rate environment.

There are a few issues with this argument, however. Most people finance their homes with 30-year mortgages, which are more closely tied to the 10-year Treasury rate, not the fed funds rate.

As markets expected higher inflation in the future, longer-term rates actually rose last year despite Fed cuts. That same phenomenon is happening now. In other words, rate cuts may actually hurt those looking to buy a home.

If mortgage rates do drop, we could see increased demand and further home price increases, offsetting the benefit.

Unfortunately, the real solution to more affordable housing is an increased supply of homes, complemented by lower rates and lower building costs.

For those looking to refinance, lower rates would clearly help, and an increasing number of homeowners are paying high rates. The general rule of thumb is to refinance when you can save 1 percentage point or more on your mortgage rate, which may be a way off for many.

Similarly, lower rates will make car buying cheaper, and the rising number of auto delinquencies shows that this relief is needed.

Who could feel the downside of lower rates?

A surprising fact about America is that we are a net saving population. You frequently see headlines lamenting the low average savings rate of Americans (which is a sad truth), but that belies the point that we do save.

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Importantly, many older and retired people are significant savers, and much of this money ends up in investments tied to interest rates. This means that lowering interest rates actually lowers the net income of the population.

Investors living comfortably by buying CDs and Treasuries will see a drop in their disposable income. The same is true for many corporations that have large balance sheets invested in bonds.

What should you do?

Now is a great time to assess any outstanding debt and monitor when it makes sense to refinance, especially if you have a mortgage rate above 7%. As rates decline, it can become more attractive to borrow an equity line and pay off any higher interest debt, such as credit cards, as well.

More important, perhaps, is thinking about locking in good interest rates now rather than waiting. Review cash positions in your bank accounts and make sure anything above a six-month cushion is generating good interest in CDs or other high-yielding investments.

If you have significant balances parked in high-yield savings, now is a great time to buy things like Treasuries to lock in rates.

Of particular note, for those in high-tax states, municipal bonds are trading at a historical discount and offer an opportunity to get tax-free income at very compelling rates.

As the environment changes, you should actively manage your exposure to interest rates to better position yourself for what may come next.

Bradley Thompson offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN), offers investment advisory products and services through Equitable Advisors, LLC, a SEC-registered investment advisor, and offers annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC in CA; Equitable Network Insurance Agency of Utah, LLC in UT; Equitable Network of Puerto Rico, Inc., in PR). Equitable Advisors and Equitable Network are affiliates and do not own or operate New Canaan Group. PPG-8363243.1 (Exp 9/29)

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