What A Fed Rate Cut Changes In Your Money, Fastest First

The first time I heard a rate cut announced on the radio, I assumed my credit card bill was about to get noticeably smaller. I was carrying about $6,000 on it at the time, and I genuinely waited for the next statement like it was a refund.

It got smaller by $1.25 a month.

That is not the Fed being stingy. A cut reaches different parts of your money at different speeds, some parts never at all, and the size of the change is usually much smaller than the headline makes it sound.

What the Fed actually cuts

The Federal Reserve sets a target range for the federal funds rate, the rate banks charge each other to borrow overnight. When it cuts, it lowers that range, usually by a quarter of a percentage point, written as 0.25 points.

A percentage point is the plain difference between two rates, so 22 per cent falling to 21.75 per cent is a drop of 0.25 points. On $10,000, a 0.25-point change is $25 a year ($10,000 × 0.0025).

You never borrow at the federal funds rate yourself. What matters is which of your rates are tied to it, how tightly, and how often they are allowed to change.

Fastest: credit cards and HELOCs

Most credit cards and home equity lines of credit (HELOCs, a revolving loan secured on your house) charge a variable rate built from the prime rate. Prime is the benchmark banks use for their variable consumer lending, and by long convention it sits at the top of the Fed's target range plus 3 points.

So when the Fed cuts by 0.25 points, prime usually falls by 0.25 points within a day. Your card agreement says the APR, the annual percentage rate, is prime plus a fixed margin, and the new rate typically kicks in at the start of the next billing cycle or the one after.

Here is my old card, with the balance sitting at $6,000 all year. At 22 per cent, the interest comes to about $1,320 a year ($6,000 × 0.22).

After a 0.25-point cut the APR is 21.75 per cent, and the interest is about $1,305 a year ($6,000 × 0.2175). The difference is $15 a year ($6,000 × 0.0025), which is $1.25 a month ($15 ÷ 12).

Fifteen dollars against $1,320. A cut changes the card by about 1 per cent of what it already costs you ($15 ÷ $1,320 is 0.011), and the other 99 per cent is still there next month.

A HELOC follows the same chain and the dollars get bigger because the balances do. On a $50,000 HELOC, a 0.25-point cut saves $125 a year ($50,000 × 0.0025), or about $10.42 a month ($125 ÷ 12).

Real money, and it arrives quickly. It is also $125 on a loan that, at an illustrative 8 per cent, costs $4,000 a year in interest ($50,000 × 0.08), so the cut trims it to $3,875 ($50,000 × 0.0775).

Slower: adjustable-rate mortgages

An adjustable-rate mortgage, or ARM, is fixed for an opening period, often five or seven years, and then resets on a schedule, commonly once a year or every six months. Between reset dates, a Fed cut does nothing to your payment.

At the reset, the new rate is an index plus a margin. The index is usually SOFR, the Secured Overnight Financing Rate, which tracks what it costs to borrow overnight against Treasury bonds. SOFR tends to move with the Fed's decisions but is set by markets, not by the Fed directly, and the loan also has caps on how far any one reset can move.

If the index is 0.25 points lower on your reset date, a $400,000 balance carries about $1,000 less interest over the following year ($400,000 × 0.0025), roughly $83 a month ($1,000 ÷ 12). If the reset is fourteen months away, so is the saving.

Not at all: fixed-rate debts

A fixed-rate mortgage, an existing car loan and an existing federal student loan were priced on the day you signed, and that price holds until the balance is gone. A cut changes them by $0.

New 30-year mortgage rates follow the 10-year Treasury yield more closely than they follow the Fed, which is why they can sit still, or even rise, in a month the Fed cuts.

New federal student loans run on their own calendar. Their fixed rates are reset once a year, using the 10-year Treasury auction held in May plus an add-on set by law, and they apply to loans made from July 1. The Fed does not set them, and a cut in October does nothing to a loan you take out in November.

The side that pays you

Savings accounts, money market accounts and money market funds pay variable yields, and those fall after a cut. High-yield savings accounts tend to follow within days or weeks, since the bank is pricing your deposit off what it can earn parking cash, and that just went down.

On $20,000, a 0.25-point drop in your savings yield is $50 a year less in interest ($20,000 × 0.0025), about $4.17 a month ($50 ÷ 12).

Certificates of deposit are the exception. A CD you already hold keeps its rate until it matures, so a $10,000 CD at an illustrative 4 per cent still pays $400 a year ($10,000 × 0.04) whatever the Fed does. Next to a savings account that dropped 0.25 points, that is $25 a year you keep ($10,000 × 0.0025), and it is the one place a cut works in a saver's favour.

Where the cut is too small to wait for

The pattern in that table is the useful part. The debts that move fastest are the expensive ones, and they move by amounts that are small next to what they cost.

Paying $1,000 off the $6,000 card saves about $220 a year at 22 per cent ($1,000 × 0.22). That is nearly fifteen times the $15 the cut delivered on the whole balance ($220 ÷ $15 is 14.7), and it does not depend on anyone in Washington.

Sort your balances this week

Pull the most recent statement for every debt and every savings account you have. On each one, find the line that says whether the rate is fixed or variable, and for the variable ones, which index it follows and what the margin is.

Write them in two columns, variable and fixed. The variable column is the only part of your money a rate cut can touch, and once you can see it, you will know exactly what the next announcement is worth to you before the radio finishes the sentence.