How the December Fed rate cut will affect your savings, CDs, and mortgages
The stock market found a lot to like in the outcome of the latest Fed meeting. The Dow Jones Industrial Average jumped by over 300 points immediately following the Dec. 10, 2025, Fed interest rate update. A closer look might have revealed reasons for a little more caution.
Fed meeting update: A rate cut and optimism
At the conclusion of its December meeting, the Federal Open Market Committee (FOMC) announced that it was cutting interest rates by 0.25%. The FOMC is the subgroup of the Federal Reserve that makes interest rate decisions.
The positive reaction of the stock market to the latest Fed update on interest rates can be largely explained by the fact that the Fed gave stock investors just what they wanted for the holidays: another rate cut.
The latest 0.25% rate cut means the Fed has slashed rates by a total of 0.75% this year, and by 1.75% overall since it began cutting rates in September of 2024. The FOMC’s new target range for the Fed funds rate is between 3.5% and 3.75%.
In addition to rate cuts, the Fed threw in a little extra gift. As part of its December meeting, the FOMC updated its economic projections for the next few years. These reflected an improved outlook from their previous economic projections, released in September.
For 2026, the FOMC raised its forecast of inflation-adjusted GDP growth from 1.8% to 2.3%. Plus, it lowered its inflation forecast from 2.6% to 2.4%.
Market reactions signal the continuing threat of inflation
In short, December’s FOMC meeting produced a rate cut and a rosier outlook for economic growth and inflation. What’s not to like?
Well, long-term bond investors weren’t too pleased. While the stock market was soaring, 30-yield bond prices fell as yields rose in the immediate aftermath of the Fed’s announcement.
This may seem like a strange dynamic – long-term bond rates rising while the Fed was cutting rates. The explanation is that the Fed rate is a short-term lending rate, while 30-year bonds represent very long-term loans. When it comes to the threat of inflation, you can think of 30-year bonds as a canary in a coal mine. They are especially sensitive to harmful conditions, so they can provide the first sign of danger.
One reason the bond market sniffed danger in the air when the Fed lowered rates was that doing so weakened a check on inflation. Although inflation cooled from mid-2022 until late 2024, over the past year, it has kept flaring up.
Given that the risk of inflation has not yet fully abated, an argument could be made that the Fed has gone too far in lowering interest rates. Over the past 50 years, the Fed funds rate has been an average of 1.5% above the inflation rate. With the most recent rate cut, the Fed funds rate is about 0.83% above the latest inflation reading.
Speaking of the latest information, one curious thing about the latest rate cut is that the FOMC did it even though a lot of key economic information is still running behind schedule because of the lingering effects of the government shutdown. So, to some extent, the Fed made this rate cut while flying blind. That’s a little out of character for a Fed that has tended to take a wait-and-see approach before acting.
This heightens speculation that the Fed is bowing to political pressure to cut rates further than it would like. That concern was already an issue because Jerome Powell’s term is due to expire in May of 2026. The White House has made it clear that it would like a Fed that would lean more heavily toward lower rates. For investors – and households – who are sensitive to inflation, that would pose a risk.
Already, evidence of differences in opinion can be seen in the latest interest rate vote. The FOMC often operates with near unanimity. For the latest vote, while a clear majority of the committee favored a quarter-point rate cut, there were three dissenting votes. Even that dissent was split. One member of the committee voted for a 0.50% rate cut. Meanwhile, two members felt there should be no rate change at this time.
Time will tell whether the Fed was right to cut rates again, or whether it acted too hastily. The next Fed meeting is in late January 2026. By then, government releases on employment and inflation should be back on target. That will give the Fed and investors more information to go on.
Until then, though, consumers will continue to face decisions about their personal finances. Below are some implications the latest Fed meeting has for banking products.
Impact on savings account rates
Savings account rates are short-term interest rates. That generally makes them sensitive to Fed rate cuts. So, don’t be surprised if you see your savings account rate fall in the upcoming weeks.
The good news is that in most cases, that rate drop should be milder than the Fed’s 0.25% rate cut. The bad news is that this is because even prior to the FOMC meeting, the average U.S. savings account rate was already just 0.40% – well below the Fed funds rate.
Near term, what matters more to savings accounts than what the Fed does is which bank you choose. Even while the average savings account rate was just 0.40%, there were several banks out there offering rates well above 3%. So, regardless of what the Fed does, most bank customers can raise their rates with a little smart shopping.
Here are a couple of tips on shopping for a better savings account rate:
- Look beyond the huge, national banks. The largest banks often offer some of the lowest rates. They figure that with their name recognition and extensive branch networks, they don’t have to offer competitive rates to attract customers. However, with online banking, you have many more choices available to you. Use that choice to find yourself a better rate.
- Don’t be swayed by temporary promotional or “teaser” rates. Savings account rates are subject to change at any time. However, some banks consistently offer better rates than others. Steer clear of rates that are scheduled to expire after a limited time, and you’ll have a good chance of maintaining an edge for a longer time.
Compare savings account rates
Impact on CD rates
CDs come in a variety of different lengths, so their reaction to Fed rate cuts depends on how long the CDs’ term is. Short-term CDs are likely to be most directly affected by the Fed’s rate cut.
CD rates have had an unusual structure over the past few years. Ordinarily, the longer the CD’s term, the higher the interest rate it pays. However, after inflation started easing in mid-2022, this relationship started to change.
Beginning in 2023, 1-year CD rates moved above 5-year CD rates. By the end of 2024, 1-year CD rates were half a percent higher than 5-year rates. The reason was that while the Fed funds rate was still pretty high, people expected that easing inflation would allow it to come down in future years. As a result, short-term CD rates were higher than long-term CD rates.
As expected, this gap between short-term and long-term rates began to narrow as the Fed started cutting rates. By this past November, it was down to 0.30%. It’s likely to narrow further in the wake of the December rate cut, and over time, the relationship between short-term and long-term CD rates should return to normal. That means long-term rates would once again be higher than short-term ones.
If you’re shopping for CDs over the next year, this may make 5-year CDs more attractive. There’s just one catch. With the threat of inflation still looming, you could regret being locked into a 5-year CD if a surge of inflation pushes rates higher. So, once you’ve identified some of the highest-yielding CDs, see which one has the mildest penalty for early withdrawals. This could give you an escape hatch from a long-term CD in the event of inflation.
Impact on mortgage rates
An illustration of the difference between short-term and long-term interest rates can be seen in the movement of mortgage rates. The Fed began cutting rates on Sept. 19, 2024. Since then, while Fed rate cuts now total 1.75%, 30-year mortgage rates have actually moved higher than they were when those rate cuts started.
Once again, inflation may be the key. The more aggressive the Fed gets about rate cuts, the more of a threat inflation will be in the long run. That could prevent mortgage rates from falling much in 2026.
Impact on personal loans
Most personal loans are unsecured. That brings another factor into the picture: credit risk.
Overdue balances on various forms of consumer debt have been rising. That prompts lenders to charge riskier customers higher interest rates to make up for the possibility of missed payments.
If you’re planning on applying for a personal loan, you should focus more on your credit score than on the Fed. The surest way of getting a better rate on your loan is to take steps to get your credit in the best shape you can before you apply.
Ultimately, when it comes to personal loans and other interest-bearing products, there are market forces at play that the Fed simply cannot control.
