- The Federal Reserve cut its benchmark interest rate for the first time since December yesterday
- The rate cut will trickle through the economy, affecting most loans and lines of credit
Yesterday, the U.S. Federal Reserve cut its benchmark interest rate by a quarter of a point amid perhaps the most intense political scrutiny in its history. The move likely means Americans will soon be able to borrow at lower rates for everything from buying a home to purchasing a car.
“The Fed,” as it is popularly known, doesn’t directly set the interest rate for loans to consumers. However, its actions influence every interest rate decision America’s banks make.
When it makes rate decisions, the Fed often predicts its future moves. At yesterday’s meeting, it cut rates by a quarter of a point — the size of its most common incremental adjustment — but it also projected that two more cuts could follow before the end of 2025.
Explaining the Fed
- The Fed sets the rate for loans between banks
- That loan tends to influence every other decision banks make
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” is a committee of financial experts appointed by the president and approved by Congress. Once Fed members are in their seats for 14-year terms, they have complete independence and don’t answer to any branch of government.
Fed members are fond of saying they have a “dual mandate” – a charge to keep unemployment low and prices stable. They traditionally have independence from political branches of the government on the theory that they should take a long-term view of both, while presidents might prefer short-term decisions.
In recent months, the Fed’s independence has come under fire from President Trump, who would likely benefit from the impression that prices were not rising.
The Fed sets the interest rate for overnight loans between banks. Banks then use that rate to decide what interest rate to charge for credit cards and loans.
So, a change in the benchmark rate changes the interest rate you’ll pay on your next mortgage, credit card, or other financing.
That includes car loans, which grew harder to obtain last month after a summer of fairly loose credit standards. Auto lenders have grown nervous amid a tense political climate and the collapse of a major subprime lender.
The Fed’s decision won’t control what they do, but it will likely make them feel more confident about issuing new car loans.
Move Doesn’t Make Your Decisions Easy
- The supply of new vehicles is tight at the moment
- Fed decision may mean “not significant relief”
A rate cut is generally good news for car shoppers. But yesterday’s decision may not be a clear win for everyone in the new car market.
The supply of new cars on dealer lots has grown tight as tariffs have limited imports of new cars and automakers have trimmed production over parts shortages. Low supply can prevent dealers from offering discounts.
Cox Automotive Chief Economist Jonathan Smoke explains, “With new-vehicle supply tight and production on the decline because of changes in regulations and trade, the retail story is shifting to one of even tighter supply and lower incentives and discounting.”
Cox Automotive owns Kelley Blue Book.
The board’s projection yesterday “suggests that Fed officials only expect rate policy to fall by one percentage point by the end of 2027. That is not significant relief and again suggests that consumer credit scores are far more important than Fed actions,” Smoke says.
Improving your credit score, he notes, can lower payments more than anything the Fed does.
