The Federal Reserve Bank building
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What the federal funds rate means to you
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.
This rate hike will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing. On the flip side, higher interest rates also mean savers will earn more money on their deposits.
Here’s a breakdown of how it works:
How higher rates are affecting your wallet
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, an all-time high. With most people feeling strained by higher prices, more cardholders carry debt from month to month.
“Now people are racking up debt and borrowing at high rates and that’s troublesome,” said Tomas Philipson, University of Chicago economist and a former chair of the White House Council of Economic Advisers.
With this rate increase, consumers with credit card debt will spend an additional $1.7 billion on interest, according to an analysis by WalletHub. Factoring in the hikes between March 2022 and March 2023, credit card users will wind up paying at least $31.7 billion in extra interest charges over the next 12 months, WalletHub found.
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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.
Rates are now off their recent peak, but not by much. The average rate for a 30-year, fixed-rate mortgage currently sits at 6.48%, according to Bankrate, down slightly from November’s peak but still much higher than it was a year ago.
“This goes to show just how hard it is for many buyers to overcome today’s persistently high home prices and mortgage rates,” said Jacob Channel, senior economic analyst at LendingTree.
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 rate adjusts right away. Already, the average rate for a HELOC is up to 7.99%, according to Bankrate.
Even though auto loans are fixed, payments are getting bigger because the prices for all cars are 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 rate on a five-year new car loan is now 6.58%, according to Bankrate.
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.
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Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by rate hikes. The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, and any loans disbursed after July 1 will likely be even higher. Interest rates for the upcoming school year will be based on an auction of 10-year Treasury notes later this month.
For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the U.S. Department of Education expects to happen sometime this year.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.
Savings accounts and CDs
While the Fed has no direct influence on deposit rates, those 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 0.39%, on average.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.5%, much higher 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 closer to 5%, according to DepositAccounts.com.
With more economic uncertainty ahead, consumers should be taking aggressive steps to secure their finances — including paying down high-interest debt and boosting savings, McBride advised.
“Grabbing a 0% credit card balance transfer offer or putting your emergency fund in a high-yield online savings account are good first steps.”