What the federal funds rate means to you
“The bank problems are probably making a lot of people think twice,” said Diana Furchtgott-Roth, an economics professor at George Washington University and former chief economist at the Department of Labor. “People are not as confident,” she said, referring to the wealth effect, or the theory that people spend less when they feel less well-off than they did before.
For its part, the Federal Reserve has been trying to rein in inflation by raising its benchmark rate.
The federal funds rate is the interest rate at which banks borrow and lend to one another overnight. But that also influences consumers’ borrowing costs, either directly or indirectly, including their credit card, mortgage and auto loan rates.
How higher rates can affect your wallet
1. Credit cards
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and your credit card rate follows suit within one or two billing cycles.
Credit card annual percentage rates are now over 20%, on average, up from 16.3% a year ago, according to Bankrate. At the same time, more cardholders carry debt from month to month as Americans, in general, feel increasingly worse off financially.
A 0% balance transfer credit card is “about the best tool available for those with credit card debt,” said Matt Schulz, chief credit analyst at LendingTree. Otherwise, consumers could consolidate and pay off a high-interest revolving balance with a lower-interest personal loan.
Even if monthly payments remain the same, consolidating $10,000 of credit card debt into a personal loan could save borrowers up to $3,000, LendingTree recently found.
2. Home loans
Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.66%, up from 4.40% when the Fed started raising rates last March.
A “For Sale” sign outside of a home in Atlanta, Georgia, on Friday, Feb. 17, 2023.
Dustin Chambers | Bloomberg | Getty Images
Other home loans are more closely tied to the Fed’s actions. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year after an initial fixed-rate period. But a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.76% from 3.96% a year ago.
Homebuyers can greatly benefit from shopping around for additional rate quotes, according to Sam Khater, Freddie Mac’s chief economist.
“Our research concludes that homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among multiple lenders.”
3. Auto loans
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans, so if you are planning to buy a car, you’ll shell out more in the months ahead.
The average interest rate on a five-year new car loan is now 6.48%, up from 4% one year ago.
The Fed’s latest move could push up the average interest rate even higher, right at a time when borrowers are already struggling to keep up with bigger monthly loan payments.
Experts say consumers with higher credit scores may be able to secure better loan terms or look to some used car models for better deals.
It’s also important to shop around. Car buyers could also save an average of $5,198 by choosing the offer with the lowest APR over the one with the highest, according to another recent report.
4. Student loans
Elisaveta Ivanova | E+ | Getty Images
Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate hike. If you are about to borrow money for college, the interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year, and any loans disbursed after July 1 will likely be even higher.
If you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates, which means that as the central bank raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.
For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.
Savings accounts and CDs
While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock-bottom for years, are currently up to 0.35%, on average.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 5.02%, much higher than last year’s 0.75% and significantly more than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.
Rates on one-year certificates of deposit at online banks are also now over 5%, according to DepositAccounts.com.
“Returns on savings accounts and CDs are the best in 15 years,” said Greg McBride, chief financial analyst at Bankrate.com, but “you have to shop around to get the benefit.”
Although most savers don’t need to worry about the security of their cash at the bank, since no depositor has lost FDIC-insured funds due to a bank failure, any money earning less than the rate of inflation still loses purchasing power over time.