What Declining Interest Rates Could Mean for You
When the Federal Reserve lowers its key short-term interest rate—the federal funds rate—financial markets often move in response. But the impact isn't uniform across the board.
How could a Fed rate cut affect your balance sheet?
Here we look at what has happened historically to various parts of the market.
Short term
Cash investments—negative impact
Yields on cash investments typically fall, but the impact on various cash-related investments can vary.
Certificates of deposit (CDs)—negative impact
CD rates often fall, but not necessarily by the same amount across all CDs of all maturities.
Savings accounts—negative impact
Bank savings rates generally have fallen gradually.
Stock market—uncertain impact
Although stock markets initially may welcome a rate cut as a counterbalance to slowing economic growth, if the slowdown turns into a recession, markets tend to decline after an initial rate cut.
Financial stocks—negative impact
A shrinking gap between what banks pay on deposits and charge on loans can hurt bank stocks.
Utilities stocks—positive impact
Because they typically pay steady dividends, utilities stocks tend to outperform as investors shift away from lower-yielding fixed income investments.
Adjustable-rate mortgages (ARMs)—positive impact
Usually tied to short-term rates, ARM rates can be expected to fall.
Auto loans—positive impact
Often tied to short-term rates, auto loan rates may fall. However, rates can vary depending on sales incentives and other factors.
Home equity loans—positive impact
Rates on home equity loans usually track short-term interest rates and may move gradually lower.
Short-term bonds—uncertain impact
Initially, short-term bond prices may rise. However, as existing bonds mature and their proceeds are reinvested into new, lower-yielding securities, the income they generate declines over time.
Intermediate term
Intermediate-term bonds—uncertain impact
Intermediate-term bonds are usually more sensitive to interest rate changes, so their price gains may be greater than for bonds with shorter maturities.
Asset-based loans—uncertain impact
Rates on loans such as pledged asset lines and margin loans may fall gradually.
Federal student loans—uncertain impact
The annual rate on federal student loans is based on the Treasury Department's auction of 10-year notes in early May, and 10-year yields are influenced more by growth and inflation expectations than by changes in the federal funds rate.
Global stocks—positive impact
International stocks generally have outperformed U.S. stocks during rate-cut cycles.
Long term
Long-term bonds—uncertain impact
While longer-term bond prices may initially rise, over time they are more affected by growth and inflation expectations than by the federal funds rate.
Mortgage rates—uncertain impact
Fixed mortgage rates generally track 10-year Treasury yields, so a lower federal funds rate won't necessarily drive mortgage rates lower.