The Federal Reserve cut interest rates at its last policy meeting and is gearing up for another rate reduction this week. 

Sure, there are plenty of other important things to pay attention to. But interest rates have a direct impact on your finances. 

Interest is the cost you pay to borrow money, whether that's through a loan or credit card. Lower interest rates mean the percentage you owe on your outstanding debt is smaller. 

Lower interest rates can also reduce the amount a financial institution or bank pays you, i.e., what you earn, for investing your money, like with a savings account. 

The Fed made a 0.5% rate cut on Sept. 18 and is projecting a smaller 0.25% cut on Nov. 7. Though one single interest rate cut won't immediately affect your wallet (nor drastically shake up the economy at large), the government's monetary policy and overall economic outlook will impact your money over the long term.

Here's a quick primer on interest rates and what you need to know ahead of Thursday's Fed decision.

The Fed and interest rates

The Fed meets eight times a year to assess the economy's health and set monetary policy, primarily through changes to the federal funds rate, the benchmark interest rate used by US banks to lend or borrow money to each other overnight. 

Although the Fed doesn't directly set the percentage we owe on our credit cards and mortgages, its policies have a ripple effect on the everyday consumer. 

Imagine a situation where the financial institutions and banks make up an orchestra and the Fed is the conductor, directing the markets and controlling the money supply. In this case, we're all in the audience watching, and we could end up with a little bit less or slightly more money in our pockets.

When the central bank "maestro" decides to increase the federal funds rate, many banks tend to increase their interest rates. This can make our debt more expensive (e.g., a 22% credit card APR vs. a 17% APR), but it can also lead to higher savings yields (e.g., a 5% APY vs. a 2% APY). 

When the Fed lowers rates, as it did in September and will likely do again this week, banks tend to drop their interest rates, too. That can make our debt slightly less cumbersome, but we won't get as high of a yield on our savings. 

The battle between inflation and the job market 

Financial experts and market watchers spend a lot of time predicting whether the Fed will hike or cut interest rates based on the direction of the economy, with a special focus on inflation and the labor market. 

When inflation is high and the economy is in overdrive, the Fed tries to pump the brakes by discouraging borrowing. It does this by setting higher interest rates and decreasing the money supply. Since March 2022, the Fed raised the federal funds rate 11 times, which helped slow down record-high price growth. 

However, the Fed takes a risk if it brings inflation down too much. Any major, rapid decline in economic activity can cause a major spike in joblessness, leading to a recession. You might hear the phrase "soft landing," which refers to the balancing act of keeping inflation in check and unemployment low. 

The economy can't be too hot or too cold. Like the porridge in Goldilocks, it has to be just right. 

Because current inflation data is on pace with the Fed's expectations, we're likely to start seeing a series of rate cuts through the rest of 2024 and into 2025. 

What another Fed rate cut could mean for your money 

When it comes to your money, the Fed's rate decisions affect your credit card debt and whether you can afford a mortgage on a house. Interest rates even influence how much annual percentage yield you earn from your savings account. 

Here's what another rate cut could mean for credit card APRs, mortgage rates and savings rates.