On October 29, the Federal Reserve (Fed) cut interest rates for the second time in 2025, following several cuts in 2024. So how do these lower interest rates impact consumers?
First, a quick summary of what the Fed has done and how that affects interest rates.
The Federal Reserve controls the federal funds rate, which doesn’t directly change rates on lending instruments such as mortgages, auto loans, and credit cards. However, the ripple effect of these rate cuts certainly influences those consumer-facing rates.
The federal funds rate is the rate at which banks borrow and lend to one another overnight. As this rate is lowered, the overall cost of borrowing decreases—meaning interest rates across the economy tend to fall. While the Fed doesn’t directly control mortgage rates, it certainly drives the general direction of borrowing costs.
A single rate cut may not make much of a difference for consumers, but this latest move marks the fifth rate cut since September of last year, totaling a 1.5% reduction. That’s significant—and part of a broader trend. The Fed had raised rates aggressively to combat post-COVID inflation, but with inflation now under control, it’s gradually cutting rates back toward normal levels.
Lower interest rates generally benefit consumers who are looking to borrow or spend—whether purchasing a home, financing a car, or taking out other loans.
We’re unlikely to see a steep drop in borrowing costs overnight, but if the federal funds rate remains low and the Fed continues to ease, borrowing rates should decline gradually over time.
On the other hand, conservative investors and retirees who rely on fixed, guaranteed, or cash-like investments may feel the pinch. Products such as CDs, money market accounts, and certain types of annuities are closely tied to the federal funds rate. These instruments have already seen yields drop over the past year, and that trend is likely to continue.
Retirees and other conservative investors should consider locking in the best available rates on fixed-income investments before further cuts occur. Meanwhile, consumers planning to borrow—especially for a mortgage—may benefit from patience, as mortgage rates typically adjust more slowly to Fed policy changes.
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