All bets are on the Federal Reserve pausing interest rate cuts at Wednesday’s meeting. Suffice it to say, this won’t be the most earth-shattering decision of 2025 so far.
Still, given that the Fed cut interest rates three times in 2024, we were hoping for a path toward lower borrowing rates. Last week, President Donald Trump said he would demand that interest rates drop immediately.
The Fed is currently in a holding pattern. There’s too much uncertainty about the incoming administration’s policies, especially regarding immigration and trade, to make any major policy shifts.
While the Fed is expected to hold interest rates steady for a while, anything could change in the next few months. Future decisions about interest rates will impact our finances, including how much we earn from our savings accounts, how much extra we owe for carrying credit card debt and whether we can afford to take out a car loan or a mortgage.
Here’s a quick primer on interest rates and how today’s Fed decision could mean for your money.
Read more: Trump Can’t Lower Interest Rates. But What Power Does the President Have Over the Fed?
How the Fed determines interest rates
The Fed meets eight times a year to assess the economy’s health and set monetary policy, primarily through changes to the federal funds rate, the benchmark interest rate used by US banks to lend or borrow money to each other overnight.
Imagine a situation where the financial institutions and banks make up an orchestra, and the Fed is the conductor, directing the markets and controlling the money supply. So although the Fed doesn’t directly set the percentage we owe on our credit cards and mortgages, its policies have a ripple effect on the everyday consumer.
Interest is the cost you pay to borrow money, whether that’s through a loan or credit card. When the central bank “maestro” increases interest rates, many banks tend to follow. This can make the debt we’re carrying more expensive (such as a 22% credit card APR vs. a 17% APR), but it can also lead to higher savings yields (a 5% APY vs. a 2% APY).
When the Fed lowers rates, as did three times last year, banks tend to drop their interest rates too. Our debt could get slightly less cumbersome (though not by much), and we won’t get as high of a yield on our savings.
How inflation and the job market affect the Fed
Financial experts and market watchers spend a lot of time predicting the timing of interest rate cuts and hikes based on the direction of the economy, with a special focus on inflation and the labor market.
Economists are concerned that the Trump administration is implementing policies that will reignite inflation. Because economic activity has continued to expand and inflation remains somewhat elevated, the Fed isn’t likely to make any interest rate cuts until later this year.
Generally, when inflation is high and the economy is in overdrive, the Fed tries to pump the brakes by setting higher interest rates and decreasing the money supply. Between March 2022 and July 2023, the Fed raised the federal funds rate 11 times, which helped slow down record-high price growth.
However, the Fed takes a risk if it brings inflation down too much. Any major, rapid decline in economic activity can cause a major spike in joblessness, leading to a recession. You might hear the phrase “soft landing,” which refers to the balancing act of keeping inflation in check and unemployment low.
The economy can’t be too hot or too cold. Like the porridge for Goldilocks, it has to be just right.
Read more: What This Week’s Fed Decision Means for Mortgage Rates
What today’s Fed decision means for your money
Over the last few years, high interest rates have made credit and loans more expensive. Although last year’s interest rate cuts didn’t immediately improve our financial situation, the government’s monetary policy this year will definitely impact your money over the long term.
Here’s what today’s decision could mean for credit card APRs, mortgage rates and savings rates.
🏦 Credit card APRs
Holding the federal funds rate steady could cause credit card issuers to charge the same annual percentage rate on your outstanding balance each month. However, every issuer has different rules about changing APRs.
“Some credit card APRs have inched down slightly after the Fed’s rate cuts last year, but they’re still really high. Even if you can’t pay off the full balance, try to make more than the minimum payment each month to avoid additional interest. If you qualify for a balance transfer card or personal loan with a lower interest rate, either could potentially help you pay off your debt faster.”— Tiffany Connors, CNET Money editor
🏦 Mortgage rates
The Fed’s decisions impact overall borrowing costs and financial conditions, which in turn influence the housing market and home loan rates, although this is not a one-to-one relationship.
“Even as the Fed holds interest rates steady, mortgage rates will continue to fluctuate in response to new economic data and political announcements. For the Fed to resume cutting interest rates and for mortgage rates to drop, further progress on inflation is needed. Even then, mortgage rates tend to rise quickly and fall slowly. It could take until the end of the year for rates to get into the low-6% range.” — Katherine Watt, CNET Money housing reporter
🏦 Savings rates
Savings rates are variable and move in lockstep with the federal funds rate, so your annual percentage yield may go down following more rate cuts later this year. Just remember that not all banks are created equal, and we regularly track the best high-yield savings accounts and certificates of deposits at CNET.
“A rate pause means we’re not likely to see any significant change in CD and savings account APYs, at least for the time being. That gives savers more time to maximize their earnings by locking in a high CD rate or taking advantage of high savings rates while they’re still around.” — Kelly Ernst, CNET Money editor
What’s next for interest rate cuts
Experts anticipate the potential for two rate cuts sometime in 2025, though market watchers and economists usually have varying opinions about the Fed’s monetary decisions. The pace of interest rate reductions will depend on the job market, inflation pressures and other political and financial developments.
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