Episode 70: What Works Wednesday: The Effects Of The Fed Lowering Interest Rates

Welcome to What Works Wednesday! Today, we're covering the Fed's recent decision to lower interest rates by 50 basis points in September 2024. We'll quickly explain why rates change, how they impact borrowing and saving, and what this means for you. Let's dive in!

Transcript:

Welcome back to another episode of What Works Wednesday. Today, I want to talk about kind of some recent news. So if you're listening to this episode a year from now, not that it won't be helpful. I think the education here will be great, but it's really pertinent to right now, September, 2024, which says last week, the Fed lowered interest rates for the first time in years by 50 basis points. So that's big news for lots of people.

who've really been struggling with higher interest rates. But what I found is that not a lot of people really understand the effects of interest rates or why they were high to begin with. And so just want to go through what's the effect of lowering interest rates? What's the effect of changing interest rates? Why do they exist and why do they change? Why are they not always 3%, 4%, 5 %? Why do we have to navigate them? So interest rates, if you think about it, they impact borrowing.

So, you know, we think about that as consumers from, you know, a mortgage, I'm borrowing money to buy a house, so I have to pay an interest rate on that, because the bank is really lending me that money and saying, hey, we're not philanthropists, we need to make something on this money too. Same thing goes, though, so we think about it from, you know, buying a car, student loans, anytime we're borrowing money and we have to pay it back, it comes with interest so that the person we're borrowing the money from, the lender,

turns a profit on it. But it also impacts high-yield savings accounts. Because how that really works, if you think about a bond with the government or a high-yield savings account or a CD at a bank, really what that is is I'm now the lender. I'm putting my money in this account or in the CD or in this bond, which now the bank or the government or the private agency, whoever is I'm doing that with,

they can now use my money however they want. I'm giving them, I'm purchasing a three month bond, which means my money's tied up for three months. They get the bank can now use that however they want, but they have to pay me back in three months with interest or with a high yield savings account. If I need my money back, I can get it back. But in the meantime, they can use it, but they have to make sure they can pay it back to me with interest whenever I need it.

because now I'm the lender. So we don't think about the fact with savings or investments that are what's called fixed income, like bonds, high yield savings, that really that's us becoming the lender to whoever we're saving with. We're giving that bank, that government, that institution, the ability to use our money, however they see fit, in the interim, but they now have a note or an agreement with us that they'll pay it back to us whenever it says, either immediately or in three months, six months, one year, three years, five years, whatever it is.