Federal Reserve policymakers will announce their latest interest rate decision on Wednesday, and while they are expected to keep rates steady, their assessment of the economy often moves markets, with implications for borrowers and savers .
The Fed last raised its benchmark rate, known as the federal funds rate, in July to a range of 5.25 to 5.5 percent. A series of rate hikes that began in March last year were aimed at curbing inflation, which has calmed but remains high, leading Fed officials to suggest they would keep rates high for an extended period of time.
This means the cost of credit cards and mortgages can remain relatively high, making it more difficult for people who want to pay off debt, as well as those who want to take out new loans to renovate their kitchen or buy a new home. new car. In recent weeks, long-term market rates that influence many types of consumer and business loans have fallen, but remain higher than before the pandemic.
“We have been very spoiled for a while with low rates, and this 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 . a wealth management company.
Here’s how different rates are affected by the Fed’s decisions – and where they currently stand.
Credit card
Credit card rates are closely tied to the Fed’s actions, meaning consumers with revolving debt have seen these rates rise over the past year — and quickly (increases typically occur in one or two cycles billing).
The average credit card rate was 20.72 percent as of Dec. 6, according to Bankrate.comup from about 16% in March of last year, when the Fed began its series of rate hikes.
People with credit card debt should focus on paying it off and assume rates will continue to rise. Zero percent balance transfer offers can be useful when used carefully (they exist for people with good credit but fees), or you can try to negotiate a lower rate with your card issuer, said Matt Schulz, chief credit analyst at LendingTree. Her research found that such a tactic often works.
Auto Loans
Rising interest rates on loans have dampened auto sales, especially in the used car market, because loans are more expensive and prices remain high, experts say. Qualifying for auto loans has also become more difficult than a year ago.
“The auto market is facing affordability issues,” said Jonathan Smoke, chief economist at Cox Automotive, a market research firm.
The average rate for new auto loans in November was 7.4 percent, up slightly from the start of the year, according to Edmunds.com. Used car rates were even higher: the average loan posted a rate of 11.6 percent in November, surpassing the peak set earlier in the year.
Auto loans tend to follow the rate on five-year Treasury bills, which is influenced by the Fed’s benchmark rate — but that’s not the only factor that determines how much you’ll pay. A borrower’s credit history, vehicle type, loan term and down payment are all taken into account when calculating the rate.
Mortgages
The 30-year fixed-rate mortgage does not move in tandem with the Fed’s benchmark rate, but generally tracks the yield on the 10-year Treasury note, which is influenced by a variety of factors, including bond expectations. inflation, the actions of the Fed and how investors react to it all.
Mortgage rates are at their highest levels in more than two decades. The average rate for a 30-year mortgage was 7.03% as of Dec. 7, according to Freddie Mac, compared to 6.33% for the same loan the same week in 2022.
Other home loans are more closely tied to the Fed’s measures. Home equity lines of credit and adjustable-rate mortgages — which each feature variable interest rates — typically increase within two billing cycles after a change in Fed rates. The average rate for a home equity loan was 8.92% as of Dec. 6, according to Bankrate.com.
Student Loans
Borrowers who already hold federal student loans are not affected by the Fed’s actions because this debt carries a fixed rate set by the government. (Payments on most of these loans were suspended for the past three years as part of a pandemic relief measure and became due again in October.)
But batches of new federal student loans are priced each July, based on the 10-year Treasury auction in May. And those loan rates have climbed: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2024) will pay 5.5 percent, compared to 4.99 percent for loans disbursed during the prior year period . Just three years ago, rates were below 3 percent.
Graduate students taking out federal loans will also pay about half a point more than the rate a year earlier, at about 7.05 percent on average, as will parents, at 8.05 percent on average .
Private student loan borrowers have already seen these rates rise thanks to past increases. Fixed and variable rate loans are tied to benchmarks that track the federal funds rate.
Savings vehicles
Savers looking for a better return on their money have had it easier: rates on online savings accounts, as well as one-year certificates of deposit, have reached their highest levels in over of a decade. But the pace of these increases is slowing.
“Consumers now have several options to earn a greater than 5% return on their money,” said Ken Tumin, founder of DepositAccounts.com, part of LendingTree.
A higher Fed rate often means banks pay more interest on their deposits, although that doesn’t always happen immediately. They tend to increase their rates when they want to make more money.
The average return on an online savings account was 4.46% as of December 1, according to DepositAccounts.com, compared to 3.02 percent a year ago. But returns on money market funds offered by brokerage firms are even more encouraging because they have tracked the federal funds rate more closely. The yield on the Crane 100 Money Fund Indexwhich tracks the largest money market funds, was 5.19 percent on Tuesday.
Rates on certificates of deposit, which tend to track similarly dated Treasury securities, have also increased. The average one-year CD at online banks was 5.32% as of December 1, compared to 4.15% a year earlier, according to DepositAccounts.com.
