After raising interest rates 10 times in the last 15 months, the Federal Reserve took a pause on Wednesday and held rates steady — at least for now. But the cumulative impact of past rate hikes will continue to weigh on the budgets of indebted Americans and reward those with money to put into savings.
The Federal Reserve has already raised its benchmark interest rate, the Federal Funds Rate, to a range of 5 to 5.25 percent in a bid to curb inflation, which is showing signs of slowing. But prices remain high – and the Fed may ultimately decide to hike rates twice more this year, according to forecasts released by policymakers on Wednesday.
That means credit card and mortgage costs may continue to rise, making it harder for people looking to pay down debt — but also for those looking to borrow new money to renovate their kitchen or buy a new car.
“We’ve been spoiled for a while with low interest rates, and that has lulled us into a false sense of security about the true cost of debt,” said Anna N’Jie-Konte, President of Re-Envision Wealth. an asset management firm.
Here’s how the Fed’s decisions affect different interest rates — and where they currently stand.
credit cards
Credit card rates are closely tied to Fed actions, which means consumers with revolving debt have seen these rates rise over the past year — and fast (rises typically occur within a billing cycle or two).
According to Bankrate.com, the average credit card rate as of June 3 was 20.44 percent, up from about 16 percent in March last year, when the Fed began its rate hike streak.
Those with credit card debt should focus on paying off that debt and expect interest rates to continue to rise. “Zero percent balance transfer offers can be helpful if used carefully (they still exist for those with good credit but come with fees), or you could try negotiating a lower rate with your card issuer, Matt said Schulz, chief credit analyst at LendingTree. His research found that such a tactic often works.
car loans
Higher lending rates are dampening auto sales, particularly in the used-car market, as borrowing is more expensive and prices remain high, experts say. Qualifying for a car loan has also become more difficult than it was a year ago.
“The vehicle market has affordability issues,” said Jonathan Smoke, chief economist at Cox Automotive, a market research firm.
The average interest rate on new car loans was up 7.1 percent in May, according to Edmunds.com 5.1 percent in the last year. Interest rates on used cars were even higher: the average loan yielded 11 percent in May, up from 8.2 percent a year earlier.
Auto loans are typically pegged to the five-year Treasury bond, which is affected by the Fed’s interest rate — but that’s not the only factor determining how much you’ll pay. A borrower’s credit history, type of vehicle, loan term, and down payment all go into this interest calculation.
mortgages
30-year fixed-rate mortgage rates do not move in tandem with the Fed’s policy rate, but generally follow the 10-year Treasury yield, which is affected by a variety of factors, including inflation expectations from the Fed’s actions and how investors react to them.
Mortgage rates have been volatile. After rising above 7 percent in late October for the first time since 2002, mortgage rates fell to nearly 6 percent in February before rebounding to 6.71 percent on June 8, according to Freddie Mac. The average interest rate for an identical loan for the same week in 2022 was 5.23 percent.
Other home loans are more tied to Fed actions. Home-equity lines of credit and adjustable-rate mortgages, each with variable interest rates, generally increase within two billing cycles of a change in Fed interest rates. The average interest rate on a home equity loan was 8.48 percent on June 7, according to Bankrate.com, up from 4.45 percent a year ago.
student loans
Borrowers who already have federal student loans are unaffected by the Fed’s actions, as these debts carry a fixed interest rate set by the government. (Payments on most of these loans have been suspended for the past three years as part of a pandemic relief effort and are expected to resume by the end of the summer.)
However, the price of new federal student loans is set in July each year, based on the May 10-year Treasury bond auction. And those loan rates are up: Borrowers with federal student loans disbursed after July 1 (and before July 1, 2024) are paying 5.5 percent, up from 4.99 percent for loans disbursed in the same period last year. Just three years ago, interest rates were below 3 percent.
Graduates who take out federal loans also pay about a half a percentage point more, or an average of about 7.05 percent, as do parents, who average 8.05 percent.
Borrowers of private student loans have already seen these interest rates rise thanks to previous increases. Both fixed and adjustable rate loans are tied to benchmarks that track the Federal Funds Rate.
economy vehicles
Savers looking for a better return on their money have it easier: interest rates on online savings accounts and one-year certificates of deposit have hit their highest levels in more than a decade. But the pace of those increases is slowing.
“Consumers now have multiple opportunities to earn over a 5 percent return on their cash,” said Ken Tumin, founder of DepositAccounts.com, part of LendingTree.
Raising the Fed’s interest rate often means that banks pay more interest on their deposits, although not always immediately. They tend to raise their interest rates when they want to bring in more money.
The average return on an online savings account was 3.98 percent as of June 1, according to DepositAccounts.com, up from 0.73 percent a year ago. But the returns on money market funds offered by brokerage firms are even more enticing because they more closely track the federal funds rate. The Crane 100 Money Fund Index, which tracks the largest money market funds, recently returned 4.91 percent.
Interest rates on certificates of deposit, which tend to track similarly dated government bonds, have also risen. According to DepositAccounts.com, the average one-year CD at online banks as of June 1 was 4.86 percent, up from 1.49 percent a year earlier.