Here’s When the Fed Is Likely to Cut Interest Rates Again, and What It Means for Stocks The Motley Fool

Let’s say the committee agrees that the economy needs a boost and decides to reduce its target rate by a quarter of a percentage point. Perhaps less clear is whether a change to this interest rate, known as the federal funds rate, impacts you on a personal level. If you have a credit card, an adjustable-rate mortgage, or a private student loan, it probably does. The Fed sets and adjusts the federal funds rate to keep the US economy on an even keel between recession and over-expansion.

Fewer rate cuts in 2025

The prime rate may not change for years or may change several times within one year, especially in economically turbulent times. It should not be confused with the discount rate set by the Federal Reserve, though these two rates often move in tandem. The prime rate increased since May 2022, moving in tandem with the FOMC’s increases to the fed funds rate to combat high inflation. xglobal markets review by online casino city One of the most used prime rates is the one that The Wall Street Journal publishes daily. As noted above, banks generally use fed funds + 3 to determine the prime rate.

Bankrate logo

The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. That’s why seeing the impact of a prime rate hike might not be immediately obvious. However, over time, the prime rate does push consumer rates in the same direction.

How the Fed’s key interest rate impacts consumers

If something worse does materialize and it triggers a correction in the S&P 500, investors should consider it a buying opportunity for the long term. After all, history proves that the index always climbs to new highs given enough time. According to the CME Group’s FedWatch tool, traders expect just one rate cut for the whole of 2025. It’s projected to happen in June, which means the Fed might pause and do nothing for the next five months. “Most forecasters have been calling for a slowdown in growth for a very long time and it keeps not happening,” Powell said. “The U.S. economy is just performing very, very well — substantially better than our global peer group.”

Here’s what the fed funds rate is, how it works and how it can ultimately end up impacting your finances — whether you’re a saver or a borrower. Most base it off the national average listed under the WSJ prime rate, but some could charge more or less depending on their goals. It alters when three-quarters of these financial institutions adjust their rates. Fluctuations in the prime rate can reflect how tough or relaxed lenders’ financing standards and requirements are. When the list of solution architect responsibilities and duties prime rate is high, it often makes borrowing a lot more challenging.

What does it mean for the economy when the federal funds rate and the prime rate go up?

The prime interest rate is the benchmark banks and other lenders use when setting their interest rates for every category of loan from credit cards to car loans and mortgages. It is often used as a reference rate (also called the base rate) for many types of loans, including loans to small businesses and credit card loans. On its H.15 statistical release, “Selected Interest Rates,” the Board reports the prime rate posted by the majority of the largest twenty-five banks. The prime lending rate is the interest rate that commercial banks charge their most credit-worthy customers. It’s a benchmark used extensively to set rates on various types of loans, including those for individuals and businesses. As of 2024, the current prime lending rate stands at 8.5%, significantly influencing consumer and business borrowing costs.

• The WSJ surveys 10 of the largest US banks and publishes a consensus prime based on their rates.
• Economists warn that some of Trump’s policy proposals — including tariffs and mass deportation — could lead to higher inflation.
• The prime rate does not directly impact auto loans, but generally, it results in higher auto loan rates, making it more expensive for lenders to borrow money.
• The prime rate in Canada was 6.45% and 1.63% in Japan as of September 2024.
• Instead, Wall Street was focused on the Fed’s forecasts for 2025 and beyond, with the central bank’s new forecasts signaling the Fed has entered “a new phase of monetary policy, the pause phase,” McIntyre added.

Why Would the Federal Reserve Hold Interest Rates?

However, if inflation did return to 2% or below that level, then we could see more than two interest rate cuts. Powell said that persistent strength has been one key reason why long-term interest rates, tied to the benchmark 10-year US Treasury yield have trended up since the Fed’s first rate cut in September. To do this, it buys a specific amount of government securities on the open market, infusing the financial system with cash. According to the laws of supply and demand, this influx of cash means private banks aren’t able to charge each other as much for loans.

The prime rate is primarily determined by the federal funds rate, which is influenced by the Federal Reserve’s (the Fed’s) monetary policy decisions. Changes in the federal funds rate, the rate at which banks lend to each other overnight, directly correlate with shifts in the prime rate. When the Fed adjusts the federal funds rate in response to economic conditions, the prime rate typically follows suit. When the prime rate goes up, so does the cost to obtain small business loans, lines of credit, car loans, mortgages, and credit cards. The Fed is tasked with the balancing act of using monetary policy to keep the economy hot enough that everyone has a job but not so hot that inflation spikes. In recent public comments, Fed officials emphasized they would remain patient and cut rates when inflation showed more signs of progress.

What Is the Impact of the Prime Rate?

• The Fed rushed to raise interest rates at the fastest pace since the 1980s as inflation surged post-pandemic.
• If the economic picture were to change significantly during 2025, then these meetings could see additional interest rate cuts, though that is currently viewed as less likely.
• The tool forecasts rate movements based on fed funds futures trading data.
• Both the federal funds rate and the prime rate are market determined interest rates.
• The Fed also slashed the federal funds rate to a historic low of almost 0% and pumped trillions of dollars into the financial system using quantitative easing (QE).
• To understand how decision-making by the Fed—and, more specifically, its Federal Open Market Committee—affects consumer and business loans, it’s important to understand how the federal funds rate works.

The latest prime rate change is in response to the Fed’s last rate cut in 2024. In the United States, the prime rate is traditionally established by the Wall Street Journal.2 Every major bank sets its own prime rate. When 23 out of the 30 largest US banks change their prime rate, the Journal publishes a new prime rate. For example, a person with an outstanding credit score might be charged, say, prime plus 9% for a credit card, while an individual with only a good score might get a rate of prime plus 15%. That prime rate is the starting point for all other interest rates, which are set at the prime rate plus an additional percentage.

If the economy performs differently than these expectations, then the interest rate outlook will evolve, too. The prime rate is the best interest rate you can get, and it’s influenced by the economy. As far as Trump’s stated plans to enact broad-based tariffs, which many economists forecast could prove inflationary, if enacted, Powell said the Fed is taking a wait-and-see approach.

Since individual consumers do not donchian channels metatrader 4 forex indicator have the same resources, banks typically charge them the prime rate plus a surcharge based on the product type they want. The prime rate is the interest rate banks charge their best customers for loans. The prime rate does not directly impact auto loans, but generally, it results in higher auto loan rates, making it more expensive for lenders to borrow money. As the prime rate fluctuates, so should your adjustable rate at the annual reset.