Federal Reserve Building
Kevin Lamarck | Reuters
What does the federal funds rate mean to you?
The federal funds rate, which is set by the US central bank, is the overnight interest rate at which banks borrow and lend to each other. Although this is not the price consumers are paying, the Fed’s moves still affect the borrowing and saving rates they see every day.
This rise in rate would correspond to 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 that savers will earn more money on their deposits.
Here’s a breakdown of how it works:
How high rates affect your portfolio
over ago Credit cards have a variable rate, and there is a direct correlation to the Fed standard. As the federal funds rate goes up, so does the prime rate, and your credit card rate follows suit over one or two billing cycles.
Credit card annual percentage rates are now over 20%, on average, and are an all-time high. With most people stressed out by the high prices, more cardholders are carrying debt from month to month.
“Now people are piling up debt and borrowing at high rates and it’s annoying,” said Thomas Phillipson, a University of Chicago economist and former chair of the White House Council of Economic Advisers.
With this rate increase, consumers who have credit card debt will spend an additional amount $1.7 billion By interest, according to an analysis by WalletHub. And WalletHub found that when factoring in the increases between March 2022 and March 2023, credit card users will end up paying at least $31.7 billion in additional interest charges over the next 12 months.
Boonchai Wedmakawand | moment | Getty Images
Although 15- and 30-year mortgage rates are fixed, tied to Treasury yields and the economy, anyone shopping for a new home has lost significant purchasing power, in part due to inflation and Fed policy moves.
Prices are now far from their recent peak, but not by much. The average rate for a 30-year fixed-rate mortgage is currently 6.48%, according to Bankrate, down slightly from the November peak but still much higher than it was a year ago.
“This shows just how difficult it is for many buyers today to beat home prices and high mortgage rates,” said Jacob Channel, chief economist at LendingTree.
Other housing loans are closely related to the Fed’s actions. Adjustable rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are linked to the base rate. Most ARMs adjust once a year after an initial fixed rate period. But the HELOC rate adjusts immediately. Already, the average HELOC rate is 7.99%, according to Bankrate.
Even though auto loans are fixed, payments increase due to the higher prices of all cars along with the interest rates on new loans. So if you plan to buy a car, you will spend more in the coming months.
The average rate for a five-year new car loan is now 6.58%, According to Bankrate.
The Fed’s latest move could push the average interest rate higher, at a time when borrowers are already struggling to keep up with larger monthly loan payments.
Chameleon 007 | iStock | Getty Images
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by a rate hike. The interest rate on federal student loans taken out for the 2022-23 school year has already increased to 4.99%, and any loans disbursed after July 1 will likely be even higher. Interest rates for the next academic year will be based on an auction of the 10-year Treasury note later this month.
Currently, anyone with existing federal education debt will benefit from rates of up to 0% until the payment hiatus ends, which the US Department of Education expects will happen sometime this year.
Private student loans tend to have a variable rate tied to Libor, Prime or Treasury bill rates — meaning that as the Federal Reserve raises rates, those borrowers will also pay more interest. However, how much of that will vary with the standard.
Savings accounts and CDs
While the Fed has no direct influence on deposit rates, rates tend to correlate with changes in the federal funds rate. the Savings account rates at some of the largest retail bankswhich has been near rock bottom for years, is currently averaging 0.39%.
Thanks, in part, to lower overheads, higher-yield 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.
Prices for one-year certificates of deposit at online banks are close to 5%, according to DepositAccounts.com.
With more economic uncertainty ahead, consumers should take aggressive steps to secure their finances — including paying off high-interest debt and boosting savings, McBride advised.
“Getting a 0% credit card balance transfer offer or putting your emergency fund into a high-yield online savings account are good first steps.”
“Beer fan. Travel specialist. Amateur alcohol scholar. Bacon trailblazer. Music fanatic.”