Fed Lowers Interest Rates For Second Time - Here's What You Need To Know

During its November 2024 meeting, the Federal Reserve lowered interest rates by 25 basis points. With this reduction, the Federal Funds Rate now sits in a range of 4.50% to 4.75%. Lower interest rates reduce the cost of borrowing to encourage consumers to spend and small businesses to invest. Learn more about the latest Fed moves and how this may impact your business.

Key Takeaways

• A 25 basis points reduction was approved by a unanimous vote during the November 2024 Federal Reserve meeting.
• The Federal Funds Rate has declined 75 basis points in 2024, making variable rate debt more affordable for small businesses.
• The Fed will meet again in December 2024 to determine if further rate cuts are necessary.

Federal Reserve Lowers Interest Rates Again

After concluding its two-day meeting on Thursday, the Federal Reserve announced a 25 basis point (25 bps) reduction in its Federal Funds Rate to 4.50% to 4.75%. Each basis point is equal to 1/100 of a percent, which means that a 25 basis point reduction is equal to 0.25%.

Today's reduction comes on the heels of the 50 bps reduction at the last Federal Reserve meeting in September 2024.

How We Got Here

When COVID hit the world's economy in 2020, the Federal Reserve slashed interest rates quickly to cushion the virus's impact on consumers and business owners. While the Fed reduced interest rates three times in the second half of 2019 as the economy slowed, the global pandemic accelerated interest rate reductions. Subsequently, the Fed left interest rates near 0% percent for nearly two years as the economy struggled to heal.

As inflation increased to highs not seen since the 1980s, the Federal Reserve ratcheted up interest rates to curb spending and stop inflation before it got out of control. Over the span of 18 months, the Fed boosted interest rates from near zero to more than 5%.

These efforts brought inflation under control, and the current reading of 2.1% is just above its target of 2%. However, the cumulative effect of higher-than-normal inflation over the past four years impacted consumer spending and business investment in a significant manner.

Where Do We Go Next?

The next Fed meeting will be held on December 17-18, 2024. Typically, it can take six months or longer before the effects of interest rate changes filter through the economy. So, the impact of this month's rate cut won't be easily measured.

However, there are indicators you can track to forecast future rate changes. Economists take regular surveys to predict where the economy and interest rates are headed. Additionally, traders bet on future changes in interest rates, and they're predicting a 70% chance of another 25 bps cut in December.

What This Means for Small Businesses

While small businesses do not borrow at the Federal Funds Rate, it is used by most banks and lenders to set interest rates.

The baseline interest rate for banks is the Prime Rate, which is 300 basis points (or 3%) above the Federal Funds Rate. Variable rate loans, lines of credit, and credit cards typically charge the Prime Rate plus a modifier for the types of loan, the borrower's credit, and other factors.

A reduction in interest rates by the Federal Reserve may impact your business in different ways. Here are a few that you should be aware of.

Interest Rate Impact on Loans

When the Fed lowers interest rates, the cost of borrowing can decrease. However, the impact will depend on what type of financing you're using and how its interest rates are set.

• Existing fixed-rate loans. The interest rates on fixed-rate term loans are set when the loan is funded. The rate and monthly payment amount do not change throughout the term of your loan. For this reason, changes in the Federal Funds Rate will not impact your interest rate or monthly payment.
• New fixed-rate loans. Once banks include this reduction in their interest rates, new loans will be cheaper. Shop around to find the most favorable lending terms, rates, and fees.
• New and existing variable rate debt. Lines of credit, credit cards, and other financing options that offer variable rates will see an immediate reduction in their interest rates. Whether you have an existing account or want to open a new one, you'll benefit from today's interest rate reduction.

Review your financing needs to determine what type of borrowing will help you reach your goals. Exploring options from different lenders is an excellent way to find the best financing options, interest rates, and terms for your business.

Savings Rates Will Decline

While interest rate cuts benefit borrowers, they have the opposite effect on savers. Businesses that have excess cash sitting in a savings account or money market account will earn less. Banks tend to slash interest rates on savings rates

If you save money in a certificate of deposit (CD), your APR will not change. The rate for your CD is set for the term you selected. However, when the CD matures, you'll likely face lower renewal rates than when you opened your account.

Research your savings options to find banks offering more appealing rates. Online high-yield savings accounts are simple to open. Additionally, you may be able to take advantage of promotional-rate CDs that banks offer to meet their funding needs.

Have We Defeated Inflation?

The Fed's metrics show that the 2.1% inflation reading in September 2024 was near its target rate of 2%. While price increases have slowed, that won't bring prices down to where they were pre-COVID.

As a business owner, many of your costs increased without an easy way to bring them back down. Labor costs have increased significantly as many minimum-wage jobs now earn $15 to $20 an hour. Supply chain issues may still affect different industries, which can also drive up costs and squeeze margins.

Renegotiating contracts, buying in bulk, and automating processes can help reduce costs and maintain margins without increasing prices on your customers.

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