The Federal Reserve has reduced interest rates by half a point, and here's how it will affect your finances.

• At its two-day meeting on Wednesday, the Federal Reserve reduced its benchmark rate by 0.5 percentage points, which is equivalent to 50 basis points.
• High borrowing costs, particularly for mortgages, credit cards, and auto loans, may soon provide relief for consumers.

On Wednesday, the Federal Reserve declared that it would decrease its benchmark rate by 50 basis points, which will alleviate the high borrowing costs that have negatively impacted consumers.

The federal funds rate, set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Despite not being the rate consumers pay, the Fed's actions impact the borrowing and savings rates consumers experience daily.

In March 2022, the central bank raised interest rates, causing borrowing costs for consumers to increase and putting many households under financial strain.

With inflation decreasing, there are reasons to be optimistic, according to Greg McBride, chief financial analyst at Bankrate.com.

One interest rate cut may not be a complete solution for borrowers facing high financing costs and has a minimal impact on the overall household budget," he stated. "The real impact will come from a series of interest rate cuts over time.

The 'vibecession' is ending as the economy nails a soft landing.

"According to Stephen Foerster, a professor of finance at Ivey Business School in London, Ontario, changes in interest rates result in winners and losers, with borrowers benefiting and lenders and savers being negatively impacted."

Whether you are a borrower or saver, or have locked-in borrowing or savings rates, it really depends on your current financial situation, he stated.

A Fed rate cut could affect various financial products, including credit cards, mortgage rates, auto loans, and savings accounts, in the coming months.

Credit cards

The rise in the average credit card rate from 16.34% in March 2022 to more than 20% today is directly linked to the Fed's benchmark rate hike cycle.

Even though annual percentage rates will gradually decrease, they will only ease off extremely high levels. With only a few cuts planned for 2024, APRs are expected to remain around 19% in the coming months, according to McBride.

He said that interest rates would go up in the elevator but would come down the stairs on the way back down.

Since interest rates won't decrease quickly enough to save you from a financial crisis, McBride advised that paying off high-interest credit card debt should be a top priority. He suggested that utilizing zero percent balance transfer offers can significantly speed up your credit card debt repayment efforts.

Mortgage rates

Fixed 15- and 30-year mortgage rates are tied to Treasury yields and the economy, but homebuyers have lost considerable purchasing power in the last two years due to inflation and the Fed's policy moves.

The average rate for a 30-year, fixed-rate mortgage is currently around 6.3%, which is significantly lower than it was just a few months ago, according to Bankrate.

LendingTree's senior economist Jacob Channel predicts that mortgage rates will remain between 6% and 6.5% in the upcoming weeks, with a possibility of dropping below 6%. However, it is unlikely that they will reach their pandemic-era lows, he stated.

Despite the decline in mortgage rates, they remain higher than they were in the past decade. Additionally, home prices remain at or near record highs in many areas. According to Channel, the Fed's move may not be enough to make buying a home more accessible for everyone, as there are still many people who will need to wait for the market to become cheaper.

Auto loans

Despite fixed auto loans, high vehicle prices and borrowing costs have pushed car buyers to their financial limits, according to Jessica Caldwell, Edmunds' head of insights.

The cost of financing a car has increased due to the rise in interest rates, which now exceeds 7%, up from 4% when the Fed started raising rates. However, rate cuts from the Fed and competition among lenders, as well as incentives in the market, may help bring rates below 7%.

""Holdout car buyers may be enticed to return to showrooms with a Fed rate cut, even though it may not drive all consumers back immediately," Caldwell said."

Student loans

According to higher education expert Mark Kantrowitz, if you have a private loan, those loans may be fixed or have a variable rate tied to the T-bill or other rates. Once the Fed starts cutting interest rates, the rates on those private student loans will come down over a one- or three-month period, depending on the benchmark. However, federal student loan rates are also fixed, so most borrowers won't be immediately affected by a rate cut.

Borrowers with existing variable-rate private student loans may eventually have the opportunity to refinance into a less expensive fixed-rate loan, but doing so will mean losing the safety nets that come with federal loans, such as deferments, forbearances, income-driven repayment, and loan forgiveness and discharge options.

Extending the term of a loan means you will pay more interest on the balance in the long run.

Savings rates

The target federal funds rate has a correlation with the yields of deposit rates, although the central bank does not have direct control over deposit rates.

Online savings account rates have increased significantly due to Fed rate hikes, allowing savers to earn more than 5% for the first time in nearly two decades, up from around 1% in 2022, according to Bankrate.

If you haven't opened a high-yield savings account or locked in a certificate of deposit, you may have missed the rate peak, according to Matt Schulz, LendingTree's credit analyst. Nevertheless, yields aren't going to drop off a cliff immediately after the Fed cuts rates, he said.

It is advisable to make either of those moves now, even though the rates have probably reached their maximum, according to him.

High-yield savings accounts are now offering rates of 1.78% on average, but top-paying CDs can provide yields of more than 5%, according to Bankrate.