What's next for US interest rates?

The Federal Reserve at its December meeting made yet another rate cut, marking the third time in a row that it has done so since its initial cut in September. This latest rate cut was by a quarter point, moving the Fed's overnight borrowing rate to a target range of 4.25% to 4.50%.

While the cut was expected, Federal Reserve Chairman Jerome Powell indicated in a press conference following the meeting that "rate cut was a 'closer call' than recent decisions," due to slowing progress on inflation, said Reuters. Still, said Powell, "we decided it was the right call because we thought it was the best decision to foster achievement of both of our goals — maximum employment and price stability."

Going forward, with the incoming Trump administration and questions over its plans to impose tariffs, the Fed promises to "carefully assess incoming data, the evolving outlook and the balance of risks," said Reuters, which "sets up a likely pause to rate cuts" at upcoming meetings.

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What will the Fed do next?

In a press conference following the Fed's December meeting, Powell "said explicitly that the Fed intended to signal the committee is 'at or near the point' where it will be appropriate to pause its campaign of rate cuts," said The New York Times.

The Fed had formerly indicated that it planned to move more aggressively with rate cuts in the coming year, but its current revised expectation "to cut interest rates more slowly next year than previously expected" is "consistent with the slower progress they've made on inflation," said the Times. Although "inflation's progress has stalled recently," it sits "just above the central bank's target of 2%," while "economic growth remains robust and the job market is strong but cooling," said CNN.

For next year, Fed officials indicated in the latest quarterly Summary of Economic Projections that two rates are coming at some point. However, said CNN, "the new projections could very well prove to be meaningless" since "much of the U.S. economy's performance will likely hinge on the policies President-elect Donald Trump and elected officials sign into law," particularly his proposals for "broad-based tariffs and mass deportations," which "could drastically reshape the economy."

When is the next interest rate decision?

The Federal Reserve will not meet again until 2025, with its first meeting of the new year scheduled for Jan. 28-29. It is anticipated the Fed will not make any further cuts then. "U.S. rate futures price in a more than 90% chance that the Fed will hold rates at its January meeting," said Reuters.

How do interest rates affect the economy?

The Fed uses interest rates "like a gas pedal and a brake pedal," Forbes said. Lowering rates stimulates the economy; raising rates slows the economy down. The agency doesn't actually set the funds rate — banks do that — but "the Fed assumes that banks will use it as a floor in their own lending," Forbes added.

Rate changes usually take "at least 12 months" to have "widespread economic impact," Investopedia said. But the stock market reacts immediately. For example, when Powell signaled last year that further interest rate hikes were likely, the market went into a bit of a tailspin. The major indexes each fell more than 1%. Beyond stocks selling off, "Treasury yields rose and the dollar extended again after Powell's comments," said Reuters.

What do rate cuts mean for your wallet?

Now that the Federal Reserve has finally started on what is expected to be a series of rate cuts, a new question emerges for consumers: What do they mean for your finances?

For the most part, it is good news. It is expected that these long-awaited interest rate cuts "will provide some welcome relief for consumers who are in the market for a home or auto purchase, as well as for those carrying pricey credit card debt," said CBS News.

However, these effects may not be apparent immediately. For mortgage borrowers, for instance, "there may be a delay, in part because many lenders have already priced in a Fed cut in the near term," said The Washington Post.

Meanwhile, "other rates, for personal loans, credit cards, and auto loans, are typically more closely tied to actual changes in the Fed's policy rate and should drop soon after the Fed acts," said Reuters, citing Parthenon's Gregory Daco.

It is not all good news. Rate cuts "could also have a downside of shaving the relatively high returns recently enjoyed by savers," said CBS News. In fact, "some experts have predicted that the top savings accounts could see rates drop by as much as 0.75 percentage points after the Fed cuts rates."

Still, especially with continued cuts, a lower benchmark rate "provides additional relief to millions of Americans grappling with high borrowing costs," said CBS News. And as indicated in election exit polls, many are "still hurting from the sharpest inflation in 40 years" and have "expressed dissatisfaction with the nation's economic trajectory."