The Fed may soon cut interest rates. That could make your next trip abroad more expensive (2024)

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The Fed may soon cut interest rates. That could make your next trip abroad more expensive? ›

A weaker dollar means Americans can buy less abroad. Fed officials in June signaled they expect to cut rates once in 2024 and four additional times in 2025. “Our expectation for now is the dollar will come under more pressure next year,” Petersen said. However, that's not necessarily a foregone conclusion.

If the Fed decides to cut its key interest rate — which is currently at a 23-year high — consumers could see lower borrowing costs for home loans and credit cards, but the extent of the impact will depend on the size of the cut.

What Happens When The Fed Raises Rates? The main reason why the Federal Reserve increases interest rates is to increase the cost of credit throughout the economy. As financial institutions themselves have to pay a price for borrowing money, an interest rate hike means it will cost them more to borrow the same amount.

And the stronger demand for goods and services may push wages and other costs higher, influencing inflation. During economic downturns, the Fed may lower the federal funds rate to near zero. In such times, the Fed can use other tools to influence financial conditions in support of its goals.

A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.

Lower rates make borrowing money cheaper. This encourages consumer and business spending and investment and can boost stock prices. Lower rates can also lead to inflation, which undermines the effectiveness of low rates. Higher rates discourage spending and can depress company returns and, therefore, stock prices.

Even without such mishaps, future repayments are likely to reduce consumption and investment. Another side effect is that low and negative rates can lift asset prices. Lower interest rates push investors into riskier assets and argue for higher prices on property and shares, asset gains that tend to boost inequality.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

1 Historically, rising interest rates have gone hand-in-hand with an appreciating U.S. dollar. This, in turn, affects economic facets domestically and around the world—particularly the credit market, commodities, stocks, and investment opportunities.

On the positive side, higher interest rates can benefit savers as banks increase yields to attract more deposits. The average savings yield is now almost 10 times higher than it was when the Fed first started raising rates, and online banks often offer even higher yields.

Where to put your cash after the Fed's interest rate increase? ›

Since savers don't know which way rates will move next, advisers often recommend a CD ladder. This means buying a series of CDs with progressively later maturity dates. Laddering ensures that some portion of your savings matures each year and can be spent or moved into other investments as rates change.

Higher interest rates have boosted banks' net interest income—resulting in higher net interest margins (NIMs) and enhanced profitability. Lenders have benefited from a widening of the spread between the interest they pay to depositors, and the income they reap on lending.

When yields or interest rates are low, it typically benefits borrowers more than lender...

Larger rate cuts would provide welcome relief to borrowers, including home and car buyers who have been priced out of the market due to high financing costs. The downside would be felt by savers, given that high-interest rate savings accounts and CDs would likely offer less favorable terms following Fed cuts.

Interest rates and bank profitability are connected, with banks benefiting from higher interest rates. When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing.

A rate reduction this fall — the first since the pandemic — would amount to a momentous shift and a potential boost to the economy. Fed rate cuts, over time, typically lower borrowing costs for such things as mortgages, auto loans and credit cards.

Future rate cuts may provide a sugar high to the U.S. economy and could lead to lower mortgage rates, though they have already started to come down in anticipation of future rate cuts.

What Is the Connection Between the Money Supply and Interest Rates? A nation's money supply and interest rates have an inverse relationship. Interest rates should be lower if there's a higher supply of money in a country's economy. Rates should be higher if the money supply is lower.

Stocks have typically risen in the six- to 12-month period following the Fed's first rate cut, as long as the economy avoids recession, Truist's research showed. Lower interest rates could also help broaden the equity rally, which has been led by a handful of megacap companies like Nvidia (NVDA.

Decreasing the policy interest rate can stimulate economic activity and cause inflation to rise. Lower interest rates encourage people to spend more and save less.