The Federal Reserve has been attempting to limit inflation by elevating its benchmark rate, known as the federal funds rate. This rate is the cost at which banks lend and borrow from each other on a daily basis, and it can have both direct and indirect consequences for consumers’ borrowing costs, such as credit cards, mortgages, and auto loans.
Credit cards: Since most credit cards come with variable interest rates, they will adjust to changes in the Federal Reserve’s benchmark rate. In the last year, the average annual percentage rate (APR) has risen to over 20%, while more and more cardholders are carrying debt from month to month.
Home loans: Though 15- and 30-year mortgages are fixed, those seeking to purchase a home have seen their purchasing power decline, partly due to higher interest rates and inflation. Other loan types, such as adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are more closely linked to the Fed’s rate.
Auto loans: Though auto loans are fixed, higher interest rates mean bigger payments. The average interest rate has risen over 2.5% from 2022 to 2023, and the Federal Reserve’s latest move could lead to further increases.
Student loans: Federal student loan rates are fixed, so those who are about to borrow money for college will have to pay higher interest rates in the 2022-23 academic year. Private loans, on the other hand, are either fixed or linked to other benchmarks, such as the Libor, prime, or T-bill, meaning higher rates in response to the Federal Reserve’s moves.
Savings accounts and CDs: The Federal Reserve does not have a direct influence on deposit rates, but they are usually connected to the target federal funds rate. In the past year, the average savings account rate has risen to 0.35%, and rates on CDs are the highest they have been in 15 years.