Should You Care That the Fed is Likely Cutting Interest Rates?

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Should You Care That the Fed is Likely Cutting Interest Rates?

Should you care that the Fed is likely cutting interest rates? We have a little more clarity on the short-term intentions of the Federal Reserve after comments from Fed Chair, Jerome Powell, from the Jackson Hole Economic Summit Friday of last week. Based on what was said, it would appear the Fed will cut .25% at their September meeting. At the summit, Powell voiced concerns about a weakening job market noting that it is currently a more concerning risk than inflation. The Fed Funds Futures market says there is an 87.5% probability that the Fed cuts rates, but there are a couple of data releases between now and then that could have an impact. The first is the jobs report on Sept 9th. A really weak report could move the needle from a .25% cut to .50%. The next is the Consumer Price Index (CPI) due on Sept 11th. Just so you know, the CPI is one of the inflation measures that the Fed watches really closely. So, the Fed will have a little more insight on inflation and the job market just before they meet. But barring any big surprises, it would appear they will be cutting. You’re going to hear a lot of perspectives in the headlines about this, but you might be wondering, why do I care what the Federal Reserve does with interest rates. Well, it does affect you, but maybe not in the way you think. The best way I can summarize why you should care is that the Fed Funds rate primarily affects short-term interest rates, which does affect your money. In the rest of the episode, I’m going to share three ways you might be affected, and one way you probably won’t.

First, the rate the Fed sets directly affects how much you get paid on your money market checking account. Money market accounts are checking accounts with some restrictions on how many times you can move money out of them. Some banks have already brought their previously aggressive money market rates down substantially in anticipation of Fed cuts. For those that haven’t, they will if the Fed continues to cut. So, the rate you are earning on your liquid money is likely to go down, and you need to keep tabs on what that rate is.

Next, the Fed Funds rate affects how much you earn on your CDs. Now you may not know that renewal rates on bank CDs are almost always lower than the current “special” they are offering. If you can keep up with your maturities and call your bank when your CDs mature, you can often get a better rate than the automatic renewal rate. But even the special CD rates are going to come down as the Fed starts to ease again.

The Fed Funds rate affects how much small businesses pay on their loans. Certain business loans are tied to the Prime rate, which is typically 3% higher than the Fed Funds rate. If the Fed cuts by .25% and if you have a variable rate loan, your rate will go down by .25%. If you have a fixed rate, then you won’t be impacted by a Fed rate reduction.

Finally, the Fed Funds rate does not directly affect mortgage rates. Mortgage rates are generally tied to the 10-year government bond. The rate for that bond is not directly affected by the Fed Funds rate. So, let’s look down the road for the next 12 months. Let’s just say that the Fed cuts the Fed Funds rate by 1% over that time period. It is possible that mortgage rates don’t move if the 10-year government bond hasn’t moved. The Fed has other means to affect longer rates, but the Fed Fund rate is not one of them. Rates more often than not do not move in a parallel fashion. In other words, even if all rates are coming down, they may not be coming down in the same amount. Long-term rates, medium-term rates, and short-term rates all move independently and there are a host of forces that make them move.

So, this is the beginning of the next chapter of Fed tight rope walking. They want to ease the Fed Fund rate enough to encourage improvement in the job market, but they don’t want to reduce so much that it causes inflation to reignite. Chairman Powell thinks tariffs are inflationary, so as long as he is at the helm, a reduction in rate will be gradual and systematic. But in May of 2026, his term will end, and he is unlikely to be reappointed. My best guess over the next 12 months is we see a 1% reduction in the Fed Fund rate. But you don’t have to make decisions purely based on guesses. You can take your deposit accounts and do what we call a maturity ladder. In this strategy, you are laddering them so that something you own is winning in any environment. Here’s what this ladder might look like. You might put some money out there for 5 years that is earning a higher rate. You might put some money coming due in 1 year or less. And you might have some money that is always available in a money market account. If rates do go down, you have that 5-year money out there earning a rate that will be really attractive and won’t be going down.

We help people with ladders like this all the time. At Foundation Bank, we have other strategies that aren’t FDIC insured that are paying fixed rates higher than CDs. We would love to tell you about it to see if they are a good fit for your investment strategy. Start your financial conversation with us today by visiting your local branch or exploring our website. It really will be worth your time. We hope you’ll subscribe to this podcast to it in your favorite podcast app and share it on social media. And until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank/McKenzie Banking Company on August 26, 2025. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. Foundation Bank/MBC is an Equal Housing Lender, Member FDIC.