The Fed Just Cut Interest Rates. Could They Fall Even Further in 2025?

The Federal Reserve cut interest rates at its September meeting. It was a widely anticipated move that represents the first interest rate reduction since early 2020. And not only did the Fed cut rates, but it did so by 50 basis points, or half a percentage point -- a more aggressive cut than many experts were predicting.

The central bank generally cuts (or raises) rates in longer-term cycles. For example, we went from a benchmark federal funds rate at near-zero levels to the recent peak target range of 5.25% to 5.5%, over a series of several rate hikes in 2022 and 2023.

While the recent rate cut was certainly welcome news for borrowers and bad news for those with money market accounts and high-yield savings accounts, it's likely to be just the first in a series of rate cuts. With that in mind, let's look at the latest expectations for interest rates and what it means for your money.

And to help hedge against falling rates, check out our best CD rates to lock in today's interest rates before the Fed cuts again.

How much will the Fed cut rates?

The recent rate cut took the target range of the benchmark federal funds rate from 5.25% to 5.5% to 4.75% to 5.0%. (Note: The federal funds rate is always set to a target range that is 0.25 percentage points wide.)

However, along with its rate cut, the Fed released the economic projections of the policymakers. Among other things, they contain the outlook for interest rates in the not-too-distant future. Here are the median expectations:

• 4.4% by the end of 2024, which implies there will be another 50 basis points (0.5 percentage points) of rate cuts between now and the end of the year.
• 3.4% by the end of 2025, which implies another 1 percentage point of rate cuts.
• 2.9% by the end of 2026, so a total of 2 percentage points of rate cuts compared to the current level.

What do lower rates mean for you?

Consumers should understand what the Fed's rate cuts mean to them.

First, there are only a few types of consumer interest rates that are directly tied to benchmark interest rates. Credit cards are a good example. Immediately after the Fed cut rates by 50 basis points, credit card interest rates went down by the same amount. Home equity lines of credit (HELOCs) and adjustable-rate mortgages also tend to be linked to the federal funds rate.

Other interest rates tend to move in the same direction but aren't directly linked. The interest rates your bank offers on savings accounts and CDs are likely to move lower, and the rates you see on auto loans and mortgages are likely to do the same.

However, it isn't a one-to-one relationship, and there's no guarantee any of them will decline. For example, my high-yield savings account still pays the exact same interest rate it did before the Fed's rate cut. As always, you should shop around for the best rates and savings accounts.

If the Fed's rate cuts proceed as expected (and that's a big "if"), it's fair to expect interest rates to move lower. You'll get paid less interest for saving money but will generally pay less interest when borrowing money. And the rate cut cycle is likely to be a gradual one, lasting well into 2026.