What does the Fed lowering interest rates mean?

Fed cuts rates: What does it mean for mortgages?

Economy reporter Allie Kelly breaks down what we know about the Federal Reserve cutting interest rates, and what it could mean for mortgage rates, car and credit card loans.

WASHINGTON, D.C. - The Federal Reserve today made a significant decision to lower its key interest rate by a quarter-point, an action that could have a ripple effect on the economy and the average person's finances.

What does "lowering interest rates" mean for me?

The central bank's decision was made amid a challenging economic climate, with persistent inflation and a weakening job market.

The Fed's decision to cut interest rates is a major event for the economy, as a rate cut can make borrowing money cheaper. This can affect a variety of financial products, including mortgages, car loans and credit cards. A lower interest rate on loans can make it more affordable for people to buy homes or cars, potentially stimulating the economy. 

The ultimate goal of lowered interest rates is to encourage spending and investing to boost the economy.

How does this affect inflation?

The Fed's decision was made despite inflation rising to 2.9% in August and jobless claims hitting a four-year-high. These conflicting economic signals have put the central bank in a difficult position, raising concerns about "stagflation," a condition of high inflation and high unemployment.

President Donald Trump has been pushing for rate cuts. In a related development, a legal battle is underway between the administration and Federal Reserve Governor Lisa Cook, whom Trump is attempting to remove from her post.

Dig deeper:

Inflation rose last month as the price of gas, groceries and airfares jumped while new data showed applications for unemployment aid soared.

Consumer prices increased 2.9% in August from a year earlier, the Labor Department said, up from 2.7% the previous month and the biggest jump since January. Excluding the volatile food and energy categories, core prices rose 3.1%, the same as in July. Both figures are above the Federal Reserve’s 2% target.

RELATED: Inflation rose last month amid weakening job market: How will the Fed respond?

Mortgages

Mortgage rates are tied to the 10-year Treasury yield plus a risk spread, which means they don't always follow the Fed's rate changes directly.

If you're in the market for a mortgage or refinancing, it might be more beneficial to monitor the bond market and your credit profile rather than just the Fed's schedule.

Local perspective:

A June report from Bright MLS said that local realtors in the DMV had been impacted by federal job cuts and financial uncertainty, with home prices falling and homes staying on the market longer. At the time, 40 percent of realtors in the DMV had clients who were getting rid of their homes because of the cuts on government spending, which included federal jobs.

Savings and deposits

Lower interest rates typically lead to reduced returns on high-yield savings accounts, money markets, and CDs. Banks often decrease deposit rates quickly after a Fed rate cut.

Savings yields tend to drop within days of the Fed's announcement. CD rates also decline, so locking in terms before a cut can help maintain higher yields.

Investments

Stocks often rally initially when borrowing becomes cheaper and consumer spending might rise. However, if rate cuts are perceived as a response to economic weakness, markets may become cautious.

Bond markets react differently, with short-term yields usually declining. Long-term yields depend on inflation expectations and investor sentiment, which can vary independently.