Reviewed by Michael J Boyle
Fact checked by Suzanne Kvilhaug

Economists and analysts pay close attention when the Federal Reserve meets to raise or lower short-term interest rates. A lower Fed rate may make stock traders rejoice, but it’s not necessarily good news for everyone: Rate cuts tend to favor borrowers but hurt lenders and savers.

Interest rate changes also greatly impact consumer behavior and the volume of economic activity. Higher rates translate to larger borrowing and financing costs for purchases made on credit.

Key Takeaways

• Interest rates have a direct effect on consumer behavior, impacting several facets of everyday life.
• The Federal funds rate is the interest rate for loans between banks.
• Borrowing becomes cheaper when rates go down, making large purchases such as home mortgages and auto loans on credit more affordable.
• Borrowing is more expensive when rates go up, putting a damper on consumption.
• Higher rates do benefit savers who get more favorable interest on deposit accounts.

What Is the Federal Funds Rate?

When we talk about the Federal Reserve raising or lowering interest rates, we are actually talking about the federal funds target rate. The target rate is a guideline for the actual rate that banks charge each other on overnight reserve loans.

Eight times a year, the Federal Open Market Committee (FOMC) meets to set the target rate. Individual banks negotiate the rates on loans to one another, but they usually stay close to the target rate. The target rate is also referred to as the “federal funds rate” or the “nominal rate.”

The federal funds rate is important because many other domestic and international rates are linked directly to it or move closely with it.

Why Do Rates Change?

The federal funds rate is a monetary policy tool used to achieve the Fed’s goals of price stability or low inflation and sustainable economic growth. Changes to the federal funds rate influence the money supply, beginning with banks and eventually trickling down to consumers.

The Fed lowers interest rates to stimulate economic growth. Lower financing costs can encourage borrowing and investing but rates can spur excessive growth and perhaps inflation when they’re too low. Inflation eats away at purchasing power and can potentially undermine the sustainability of the desired economic expansion.

The Fed will raise interest rates when there’s too much growth. Rate increases are used to slow inflation and return growth to more sustainable levels. Rates can’t get too high because more expensive financing can lead the economy into a period of slow growth or even contraction.

2%

The target inflation rate that the Federal Reserve seeks to achieve.

Financing

The Fed’s target rate is the basis for bank-to-bank lending. The rate that banks charge their most creditworthy corporate customers is known as the prime lending rate. It’s linked directly to the Federal Reserve’s target rate and is often referred to as simply “the prime.”

Consumers can expect to pay prime plus a premium depending on factors such as their assets, liabilities, income, and creditworthiness.

A rate cut could help consumers save money by reducing interest payments on certain types of financing that are linked to prime or other rates that tend to move in tandem with the Fed’s target rate.

Mortgages

A rate cut typically lowers the cost of financing a home but the extent of the benefit from lower mortgage rates depends on the type of mortgage loan.

A rate cut will have no impact on the amount of the monthly payment for a fixed-rate mortgage. Low rates can be good for potential homeowners but fixed-rate mortgages don’t move directly with the Fed’s rate changes. A Fed rate cut changes the short-term lending rate, but most fixed-rate mortgages are unaffected.

Adjustable-rate mortgage (ARM) payments will generally decrease when the Fed issues a rate cut. The amount by which a mortgage payment changes will depend on the rate the lender uses when it resets. Many ARMs are linked to short-term Treasury yields that tend to move with the Fed. Many home-equity loans and home-equity lines of credit (HELOCs) are also linked to prime or SOFR.

Important

The FOMC decided to maintain the federal funds rate at 4.25%-4.5% in March 2025 based in part on progress made against inflation.

Credit Cards

The impact of a rate cut on credit card debt also depends on whether the credit card carries a fixed or variable rate. A rate cut usually results in no change for consumers with fixed-rate cards. Many credit cards with variable rates are linked to the prime rate, so a federal funds rate cut will typically lead to lower interest charges.

Credit card companies can change interest rates, even for cards with a fixed rate, so long as they provide advance notice.

Savings Accounts

Consumers usually earn less interest on their savings when the Fed cuts interest rates. Banks typically lower rates paid on cash held in bank certificates of deposits (CDs), money market accounts, and savings accounts. It usually takes a few weeks for the rate cut to be reflected in bank rates.

CDs and Money Market Accounts

There’s no need to worry about a rate cut if you’ve already purchased a bank CD because your rate is locked in. A rate cut will result in lower rates. If you purchase additional CDs, however, your interest payments will be lower.

Deposits into money market accounts (MMAs) will see similar activity. Banks use MMA deposits to invest in traditionally safe assets like CDs and Treasury bills, so a Fed rate cut will result in lower rates for money market account holders.

Money Market Funds

A money market fund (MMF) is an investment account, unlike a money market account. Both pay higher rates than regular savings accounts, but they may not have the same response to a rate cut.

The response of MMF rates to a rate cut by the Fed depends on whether the fund is taxable or tax-free, such as one that invests in municipal bonds. Taxable funds usually adjust in line with the Fed, so consumers can expect lower rates from these securities after a rate cut.

Rates on municipal money market funds already fall beneath their taxable counterparts because of their tax-exempt status, and they may not necessarily follow the Fed. These funds may also be linked to rates such as SOFR or the Security Industry and Financial Markets Association (SIFMA) Municipal Swap Index.

Investments

Interest rates also directly impact your investment portfolio including a 401(k) plan and brokerage accounts. Lower rates are often a boost to stock prices, because they make it easier for companies to borrow money. Lower rates also let investors with margin accounts take greater advantage of leverage at lower rates, increasing their effective purchasing power.

Higher rates can pull stocks lower but increase the value of bonds. Longer-term bonds are generally more sensitive to interest rate changes than near-term bonds.

Explain Like I’m Five

The federal funds rate is the interest rate for short-term loans between banks. Eight times a year, the Federal Reserve decides whether to raise or lower its target rate. Other loans are based on the funds rate, so a rate change has a ripple effect throughout the banking system.

A rate cut makes it cheaper to borrow money. That makes it cheaper for corporations to make investments and hire people, and makes it easier for consumers to buy a house or car. Higher rates make it harder to borrow, but they increase the interest rates on bank deposits.

How Will I Use This in Real Life?

If you ever take out a mortgage or a car loan, or even a credit card, the interest rate will be partially determined by the federal funds rate. If you plan to take out a large loan, you may be able to save money by waiting until interest rates are low.

When the Federal Reserve changes the funds rate, it affects the costs of other loans, too. Some consumer loans have floating interest rates: When the Fed decides to raise rates, your monthly payment goes up.

How Do Interest Rates Affect Consumers?

Higher interest rates generally make the cost of goods and services more expensive for consumers because the cost of borrowing to purchase them is higher. Consumers who want to buy products that require loans, such as a house or a car, will pay more because of the higher interest rate. This discourages spending and slows down the economy. The opposite is true when interest rates are lower.

Who Benefits From High Interest Rates?

Financial institutions, and specifically banks, generally benefit from higher interest rates. Banks make money from the rates they charge on their loans to consumers. The higher the rate, the more money they make.

Who Benefits From Inflation?

Borrowers benefit the most from inflation, as the money they pay back to lenders is worth less than it was before. This is the case provided that wages are also increasing for the borrower.

The Bottom Line

The Federal Reserve uses its target rate as a monetary policy tool and the impact of a change to the target rate depends on whether you’re a borrower or a saver. It’s important to read the terms of your financing and savings agreements to determine which interest rates apply to you and determine how a Fed cut can impact your financial situation.

Fact checked by Suzanne Kvilhaug
Reviewed by Thomas J. Catalano

What Is Federal Reserve Regulation D?

Regulation D is a Federal Reserve rule created to ensure banks and credit unions have enough cash reserves, and it sets requirements for savings and money market accounts.

In 2020, the Fed changed the reserve requirement for financial institutions and removed the limit on consumers’ savings withdrawals. Despite the suspension of the rule, banks and credit unions were given the option to enforce a monthly limit.

Key Takeaways

• Regulation D, a federal rule, set reserve requirements for banks and credit unions.
• It limited the number of withdrawals or transfers consumers could make from their savings and money market accounts.
• Financial institutions are no longer required to impose the limits.
• Some banks and credit unions have kept the six-transaction limit in place, while others do not enforce the rule.

How Regulation D Worked

The Federal Reserve put Regulation D in place to implement monetary policy.

One way it sought to ensure adequate levels of reserves at financial institutions was to limit withdrawals and transfers from savings accounts. The rule does not limit all types of transactions; it focuses on those considered to be “convenient” transactions, and those include bill pay services, writing a check, using a debit card, overdraft transfers, and money transfers completed by phone, fax, or online.

Bank checks and withdrawals or transfers made inside a bank or at an ATM did not count toward the monthly limit.

The rule applied to savings-related accounts and did not limit checking accounts, which are transaction-oriented (intended for tasks such as paying bills and making purchases).

Important

Fed Reg D is not the same as Securities and Exchange Commission (SEC) Regulation D, which governs private placement exemptions.

Changes in Regulation D

In April 2020, the Federal Reserve announced that it was no longer requiring financial institutions to enforce transaction limits because it was switching to a different reserve strategy. Additionally, it wanted to give consumers greater access to their cash during the coronavirus pandemic and the related economic impact. However, the interim rule did not forbid financial institutions from maintaining the withdrawal limits, and some banks and credit unions continue to enforce the monthly caps.

Which Transactions Were Limited?

The rule covered these transaction types for savings and money market accounts:

• Online transfers
• Phone or fax transfers
• Overdraft transfers to a checking account
• Debit card transactions
• Check transactions
• Automated transfers, such as recurring withdrawals or bill pay

Is Regulation D Still Suspended?

As of May 3, 2025, Regulation D was still suspended. It will likely continue to be suspended as it is part of the Fed’s ample supply of money strategy.

What Are the Requirements of Regulation D?

Regulation D required banks to restrict transactions from savings and money market accounts to a maximum of six per month to help the Fed implement monetary policy. The requirements were suspended in 2020.

Can I Withdraw $20,000 From a Bank?

Yes, you can withdraw $20,000 from a bank. Your bank may not allow that amount in one transaction, so it’s best to check before you make the withdrawal to learn its procedures.

The Bottom Line

Some banks and credit unions enforce a monthly six-transaction limit on savings or money market accounts, but they are no longer required to do so by Regulation D. Contact your financial institution or check your account details to see if you are subject to any limits and to understand any related issues.