With the Federal Reserve expected to keep its benchmark rate unchanged on Wednesday, U.S. households will want to know if rate cuts are on the horizon, which could have significant implications on their monthly budgets.
The central bank has already raised its key rate from 5.25 to 5.50 percent, the highest level in more than two decades, as part of a series of hikes over the past two years. The aim was to curb inflation, which has cooled considerably. Fed officials have kept rates steady since July while continuing to monitor the economy.
It has remained robust, meaning policymakers may take their time before making rate cuts. But some banks have already started reducing the rates they pay to consumers, including on certain certificates of deposit.
Here’s how different rates are affected by the Fed’s decisions – and where they stand.
Credit card
Credit card rates are closely tied to central bank actions, meaning consumers with revolving debt have seen these rates rise rapidly over the past two years. (Increases usually happen within one or two billing cycles.) But don’t expect them to decrease that quickly.
“The urgency of paying off expensive credit cards or other debt is not diminished,” said Greg McBride, chief financial analyst at Bankrate.com. “Interest rates took the elevator up, but they’re going to take the stairs down.”
This means consumers should prioritize paying off the most expensive debts and take advantage of zero percent, low-rate balance transfer offers when they can.
The average credit card rate with assessed interest was 22.75% at the end of 2023, according to the Federal Reserve, compared to 20.40% in 2022 and 16.17% at the end of March 2022, when the Fed began its series of rate hikes. rate.
Auto Loans
Auto loan rates remain high, which, coupled with rising car prices, continues to reduce affordability. But that hasn’t deterred buyers, many of whom returned to the market after putting off purchases for several years due to limited supplies during the Covid-19 pandemic and then Russia’s invasion of Ukraine.
The market will most likely normalize this year: inventories of new vehicles are expected to increase, which could help ease prices and lead to better deals.
“The Fed’s indications that it has met its rate-hike targets could be a sign that rates could be lowered at some point in 2024,” said Joseph Yoon, a consumer analyst at Edmunds, a consumer research firm. automotive research. “Improved inventory for manufacturers means buyers will have more choice and dealers will have to earn their customers’ business, potentially with greater discounts and incentives. »
The average new car loan rate was 7.1% in December 2023, according to Edmunds, up from 6.7% in December 2022. Used car rates were even higher: the average loan had a rate of 11, 4% in December 2023, compared to 10.3% in December 2023. the same month of 2022.
Auto loans tend to track the five-year Treasury note, 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
Mortgage rates have been volatile in 2023, with the average rate on a 30-year fixed loan rising as high as 7.79% in late October before dropping about a point and stabilizing: the average rate on a 30-year fixed loan 30-year mortgage was 6.69% at the end of October. January 25, according to Freddie Mac, compared to 6.60 percent for an identical loan the same week last year.
Rates on 30-year fixed-rate mortgages do not move in tandem with the Fed’s benchmark, but generally follow the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations in terms of inflation, the Fed’s actions and the reaction of investors.
Other real estate loans are more closely linked to central bank decisions. 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 home equity loan rate was 8.91 percent as of January 24. according to Bankrate.comwhile the average home equity line of credit was 9.18 percent.
Student Loans
Borrowers who hold federal student loans are not affected by the Fed’s actions because these debts carry a fixed rate set by the government.
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, 2023 (and before July 1, 2024) will pay 5.5%, compared to 4.99% for loans disbursed during the same period a year ago. 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 their rates rise due to previous increases: Fixed and variable rate loans are tied to benchmarks that track the federal funds rate.
Savings vehicles
With the Fed’s benchmark rate unchanged, savings account rates should remain relatively stable. (A higher Fed rate often means banks will pay more interest on their deposits, but that doesn’t always happen immediately. They tend to pay more when they want to bring in more money.)
But now that rates may have peaked and could possibly fall, some online banks have already begun lowering rates on certificates of deposit, or CDs, which tend to follow those on similarly dated Treasury securities. Earlier this month, for example, online banks Ally, Discover and Synchrony all cut their 12-month CD rates to 5%, from 5.15% to 5.30%. Marcus now pays 5.25 percent, up from 5.50 percent.
“It’s a good time to focus on CDs,” said Ken Tumin, founder of DepositAccounts.com, part of LendingTree. “CD rates are already falling, and as we get closer to the first rate cut, they will only fall further. »
The average one-year CD at online banks was 5.35 percent as of Jan. 1, up from 4.37 percent a year earlier, according to DepositAccounts.com.
The average return on an online savings account was 4.49% as of January 1, according to DepositAccounts.com, compared to 3.31 percent a year ago. But the returns on money market funds offered by brokerage firms are even more attractive 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 5.17 percent on January 30.
