For the first time in 2025, the Federal Reserve is reducing borrowing costs, including credit cards, loans and car financing.
As expected, the central bank cut the federal funding rate by 25 basis points on Wednesday, cutting its 4% to the 4.25% range. That benchmark rate affects how much interest a lender charges on certain types of credit and loans.
The Fed has been rising for more than two years to help slow down the out-of-pocket. On July 30th, Federal Reserve Chairman Jerome Powell described the rate as “conservatively restrictive.”
Despite the higher borrowing costs, inflation rose to 2.9% in August from the previous year, when the Fed exceeded its 2% target. However, central banks are now shifting their focus to weakening the labour market. Both price stability and labor market support are part of the Fed’s dual mission.
President Donald Trump has publicly oppressed the Fed on lower rates. On September 15th, he wrote about the society of truth: “Too late” must cut interest rates more than he had in mind. The house will be soaring!!!”
Although Wednesday’s cuts were already anticipated, Trump’s continued criticism puts new pressure on the central bank’s longstanding independence.
How rate reductions affect your borrowing costs
Wednesday’s quarterpoint cuts translate into small but notable savings across common types of debt. Here’s what this looks like based on the estimates provided by Bankrate:
Credit Card
Credit card interest rates vary and are directly linked to the Fed benchmark. In other words, borrowers with a balance will see changes within several billing cycles.
The average rate has dropped by about a quarter point, with the current average rate slightly down by 20.12%. If you have a balance of $5,000, it will be a few dollars from your monthly interest payment.
Automatic loan
New car loan fees will not be moved by the Fed through lockstep, but usually lower when borrowing costs go down. A $35,000 loan over five years will reduce payments by about $4 per month, with a quarter-point reduction based on the average percentage rate of 7.19% on Wednesday.
The average 60-month loan rate in February was 7.91%. At that level, the same loan costs around $11 a month more than today.
Home Equity Credit Line
HELOC allows homeowners to earn a 10-20-year repayment period, usually followed by a 10-year draw period, through a revolving credit line, for a homeowner to oppose their equity. Prices fluctuate, tied to the prime rate and move along with the Fed benchmark, so borrowers usually see lower costs immediately after interest rate reductions.
Based on the average rate of 8.5% on September 1, a balance of $50,000 will reduce payments by about $10 a month during the interest-only draw period, and by bank rate calculations, it will decrease by about $7 as the repayment begins.
Adjustable mortgage
Unlike a 30-year fixed mortgage, the arm starts with a set interest rate for the early semester (often five, seven or ten years) before adjusting regularly based on market benchmarks.
For the current 6.56% $250,000 five-year arm, a quarter-point FED reduction will reduce your payments of around $40 a month, but the loan resets the reset to the new rate. New arm offers can reflect the Fed cut within a few days as lenders adjust their pricing.
What will happen next
More cuts may be ongoing. As job markets decline and new tariffs bring uncertainty to the economy, according to the Fed FedWatch tool, Futures Markets is priced with two additional cuts (total of 75 basis points) by the end of the year.
These rate reductions add additional savings, but it’s less likely once inflation recovers again.
At a press conference on July 1, Powell said interest rate cuts were “data dependent.” And in a speech on August 22, he warned that “upward pressure on prices from tariffs could spur the more permanent inflation dynamics.”
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