(Yahoo!Finance) - The Federal Open Market Committee (FOMC) recently held its last meeting of the year, which culminated in a third (and final) cut to the federal funds rate for 2025. As a result, interest rates on consumer loans and bank accounts will continue to fall.
Will these cuts continue into 2026? And if so, how will that impact your bottom line? Here’s what the experts have to say, and what you should do to prepare in the meantime.
What is the federal funds rate, and why does it matter?
The federal funds rate is the interest rate at which depository institutions charge each other for ultra-short-term loans, usually overnight. It's expressed as a range, and financial institutions negotiate a specific rate within that range.
The federal funds rate plays a key role in the Federal Reserve’s management of inflation. When inflation is too high, the Fed typically raises its rate to reduce consumer spending and slow economic activity. Conversely, the Fed may lower its rate to stimulate economic activity and growth.
The federal funds rate doesn’t directly affect the rates offered by individual banks, but it does have an influence. When the Fed’s target rate increases or decreases, rates for high-yield savings accounts, certificates of deposit (CDs), money market accounts, credit cards, home loans, and other banking products generally follow suit.
That means when the Fed’s rate is high, it can be a good time to deposit money in a bank account and earn more interest. When it’s low, it’s a good time to borrow money or refinance at a lower interest rate.
How the federal funds rate has changed over time
After inflation peaked in June 2022, the Fed implemented a series of rate hikes in an effort to tame rising costs. By July 2023, the federal funds rate reached a target range of 5.25%-5.5% — the highest it had been since 2006.
The Fed then held rates steady until September 2024, at which point it made a 50-basis-point cut. The federal funds rate was reduced by another 25 bps in November, and again in December.
Three more cuts occurred in 2025 — in September, October, and December — dropping 25 bps each time. Currently, the Fed’s target range stands at 3.5%-3.75%.
Fed predictions for 2026, according to the experts
The Fed’s job is to carefully monitor the economy and maintain stability. During each meeting, it may adjust the federal funds rate and overall monetary policy based on what the economy needs to continue running smoothly. However, it doesn’t necessarily announce its plans ahead of time.
Economic experts monitor the economy's health closely and formulate their own ideas about the Fed’s next move based on the data they have available. For example, the latest dot plot published by the Fed shows that a single rate cut in 2026 is probable. However, that cut may not come until later in the year; CME’s FedWatch tool predicts only a 24% chance of a rate cut following the Fed’s next meeting in January.
“The path of [the federal funds rate] in 2026 will be influenced by several factors, with inflation and the labor market crucial items,” said William Connor, CFA, CFP, and partner at Sax Wealth Advisors. “There is a segment of economists whose work shows that monetary policy is overly restrictive and needs to be lowered to better support economic growth.”
Connor explained that slowing inflation and concerns surrounding the labor market make reductions to the federal funds rate likely in 2026. “The number and scope of any cuts will be data-dependent — higher inflation rates and/or stronger economic growth lessens the probability of cuts, while weakness in the labor market and/or continued drops in the rate of inflation would make more cuts likely,” he said.
3 money moves you can make ahead of the next rate cut
Regardless of whether the federal funds rate changes, it’s a good time to evaluate your banking products and potentially make some savvy money moves that could pay off later.
1. Make sure you’re getting the most competitive savings account rate
Right now, the national average savings interest rate is just 0.4%. But some banks and credit unions offer high-yield savings accounts that earn 10 times that — at least, for now. If your interest rate isn’t competitive, you could be leaving money on the table.
So, shop around and see if you’re getting the best rates possible on your savings. If not, it could be time to switch banks or open up a new type of account.
2. Lock in today’s high CD rates
The best CD rates today are comparable to HYSAs. But one of the major perks of CDs is that they provide a fixed interest rate for the entire term. This allows you to lock in a high APY for several months or years, even if deposit rates in general start going down.
Keep in mind that if you make a withdrawal before your CD reaches maturity, you’ll be subject to an early withdrawal penalty. So be sure to carefully consider your savings goals before tying up your money in a CD. If you’re saving for a longer-term goal (six months to two years), opening a CD and securing a higher rate could help you reach it even faster.
3. Hold off on financing any major purchases
If you’re preparing for a big-ticket purchase (like a car or house), applying for a new loan now could potentially lock you into a higher interest rate.
It’s impossible to predict with certainty how the Fed will change rates — if at all. However, if Fed officials do decide to cut rates next year, lenders will likely reduce their rates as well. So it could pay to hold off.
By Ivana Pino · Senior Writer
