Personal Finance

The Fed Just Paused Interest Rate Cuts. Here's What That Means for You

Maurie Backman

Published: February 7, 2025 8:51 am

The Federal Reserve spent a good part of 2022 and 2023 implementing interest rate hikes in response to rampant inflation. But now, the central bank needs to reverse some of those hikes as inflation cools. And in late 2024, it lowered its benchmark interest rate during three consecutive meetings.

But at its late January meeting, the Fed opted to hold rates steady. That move wasn’t necessarily a surprise, though, as many economists expected a pause.

In its post-meeting statement, the central bank said, “Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated…In support of its goals, the Committee decided to maintain the target range for the federal funds rate.”

You may be wondering what a pause in interest rates means for you. And the reality is that it has the potential to be both bad news and good.

Why paused interest rates aren’t the best news

Inflation surged in the wake of the pandemic when generous stimulus policies led to an uptick in consumer spending. Now that annual inflation has been sitting closer to the Fed’s ideal 2% level, rate hikes are no longer on the table.

But rate cuts aren’t a given, either. The latest Consumer Price Index reading puts annual inflation at 2.9%. If inflation continues to hold steady at that level, the Fed might opt to pause rate cuts until it starts to creep downward.

That’s not the best news for consumers looking to borrow money.

Consumer loan rates are commonly tied to the federal funds rate, so a pause in rate cuts means it’s not going to get less expensive to finance a car, sign a personal loan, or tap home equity anytime soon. Consumers with credit card balances also aren’t going to enjoy any relief in the near term.

Interestingly enough, the Fed’s rate cuts don’t seem to be influencing mortgage rates all that much. Mortgage rates are commonly tied to Treasury yields, and they’re stuck in a stubbornly high spot.

But there’s some positive news

On the other hand, the fact that the Fed has held rates steady means consumers have an opportunity to enjoy higher savings rates a bit longer. Not only are many high-yield savings accounts paying close to 4% today, but CD rates are also in a strong spot.

CDs are a good option for people who are looking to save for near-term goals and can’t afford to risk stock market losses. Savings accounts, on the other hand, are an ideal option for people who need a home for an emergency fund, or who are tying up some cash for a near-term purchase, like a down payment on a car or home.

What will the Fed do next?

The Fed’s next meeting is set for mid-March. But whether it chooses to cut interest rates or pause them it still up in the air. Much will depend on how inflation trends in the next month or so.

Of course, there’s pressure on the Fed to move forward with rate cuts from the new administration. But ultimately, Fed officials are going to look at the data and make a call.

If you’re wondering how to manage your finances given where interest rates are at, it’s a good idea to sit down with a financial advisor. An advisor can help you make important financial decisions based on economic conditions coupled with your personal goals.