What the Federal Funds Rate means to you
“The banking problems are probably making a lot of people think twice,” said Diana Angstgott-Roth, an economics professor at George Washington University and former chief economist at the Department of Labor. “People aren’t as self-aware anymore,” she said, referring to the wealth effect, or the theory that people spend less when they feel less wealthy than before.
For its part, the Federal Reserve has attempted to curb inflation by raising interest rates.
The Federal Funds Rate is the rate at which banks lend and borrow money from each other overnight. But it also directly or indirectly affects consumers’ borrowing costs, including their credit card, mortgage, and car loan rates.
How higher interest rates can affect your wallet
1. Credit cards
Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. When the federal funds rate goes up, so does the federal funds rate, and your credit card rate follows within a billing cycle or two.
Credit card APRs now average over 20%, up from 16.3% a year ago, according to Bankrate. At the same time, cardholders are becoming more and more indebted every month as Americans generally feel financially worse off.
A 0% 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-yield revolving balance with a lower-interest personal loan.
Even if monthly payments stay the same, consolidating $10,000 of credit card debt into a personal loan could save borrowers up to $3,000. Recently found LendingTree.
2. Home loans
Although interest rates on 15- and 30-year mortgages are fixed and tied to Treasury yields and the economy, anyone who buys a new home has lost significant purchasing power, in part due to inflation and Fed policies.
The average interest rate on a 30-year fixed-rate mortgage is currently 6.66%, up from 4.40% when the Fed started raising rates last March.
A “For Sale” sign outside a home in Atlanta, Georgia on Friday, February 17, 2023.
Dustin Chambers | Bloomberg | Getty Images
Other home loans are more closely linked to Fed actions. Adjustable rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are tied to the prime rate. Most ARMs adjust once a year after an initial fixed rate period. But a HELOC adapts instantly. Already, the average rate for a HELOC is 7.76% versus 3.96% a year ago.
Homebuyers can benefit greatly from scouting for additional interest rate offers, according to Sam Khater, Freddie Mac’s chief economist.
“Our research concludes that taking the time to shop with multiple lenders could potentially save homebuyers $600 to $1,200 annually.”
3. Auto Loans
Even when car loans are fixed, the payments continue to increase as the price of all cars increases along with interest rates on new loans. So if you’re planning to buy a car, you’ll be shelling out more in the coming months.
The average interest rate on a five-year new car loan is now 6.48%, versus 4% a year ago.
The Fed’s latest move could push the average interest rate even higher, at a time when borrowers are already struggling to keep up with higher monthly loan payments.
Experts say consumers with higher credit scores may be able to get better credit terms or seek better deals on some used car models.
It’s also important to look around. According to another recent report, car buyers could also save an average of $5,198 by choosing the offer with the lowest APR over the highest.
4. Student Loans
Elisaveta Ivanova | E+ | Getty Images
Federal student loan rates are also fixed, so most borrowers are not immediately affected by a rate hike. If you’re looking to borrow money for college, the interest rate on federal student loans taken out for the 2022-23 academic year has already risen to 4.99%, up from 3.73% last year, and all after July 1 disbursed loans will probably be the same higher.
If you have a personal loan, these loans can be fixed or have a floating rate tied to Libor, Prime, or T-Bill interest rates, meaning borrowers are likely to pay more interest if the central bank interest rates will increase, although how much more will vary by benchmark.
Right now, everyone with existing government education debt is benefiting from 0% interest rates until the payment freeze ends, which the Department of Education expects later this year.
savings accounts and CDs
While the Fed has no direct influence on deposit rates, rates tend to correlate with changes in the target federal funds rate. Savings account rates at some of the largest retail banks, which have been at low levels for years, are now averaging as low as 0.35%.
Thanks in part to lower overheads, high-yield online savings account rates are up to 5.02%, much higher than last year’s 0.75% and well above the average traditional bank-to-bankrate rate.
Interest on one-year certificates of deposit at online banks is also now over 5%, according to DepositAccounts.com.
“Returns on savings accounts and CDs are at their best in 15 years,” said Greg McBride, chief financial analyst at Bankrate.com, but “you have to look around to take advantage.”
Although most savers need not worry about the safety of their money 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.
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