The Impact of Unchanged Federal Reserve Rates on Your Finances: What You Need to Know

The Federal Reserve left its target federal funds rate unchanged Wednesday, but did not indicate an end to its
aggressive rate hike campaign.

This provides little relief for households facing sky-high borrowing costs.

In total, Fed officials have raised rates 11 times in the past 18 months, bringing the key interest rate to a target range of 5.25% to 5.5%, the highest level in over 22 years.

“I’m concerned for the consumer,” said Tomas Philipson, economist at the University of Chicago and former chair of the White House Council of Economic Advisers. “People are being hit on both fronts — lower real wages and higher rates.”

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Since wage growth for many Americans has not been able to keep up with rising prices, these households are feeling the squeeze and are going into debt just as borrowing rates are increasing, according to Philipson.

Real average hourly earnings fell 0.5% in August, while borrowers are paying more in credit card, student loan, and other types of debt interest.

“Borrowing is very costly, period,” Philipson said.

The federal funds rate, set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. While this is not the rate consumers pay directly, the Fed’s actions still impact the borrowing and savings rates they encounter daily.

Here’s how the central bank’s rate increases have affected consumers so far:

As the federal funds rate has risen, so has the prime rate, which directly affects most
credit card rates.

The average annual percentage rate for credit cards is now over 20%, the highest it has ever been. Additionally, with many people feeling the strain of higher prices, more cardholders are carrying debt from month to month.

According to Matt Schulz, chief credit analyst at LendingTree, there is little relief in sight for those with a balance.

“Even though the Fed chose not to raise rates in September, credit card interest rates are expected to continue increasing,” he said.

In the meantime, paying down that debt should be a top priority, Schulz added.

While 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, potential homebuyers have lost significant purchasing power due to inflation and the Fed’s policy actions.

According to Sam Khater, chief economist at Freddie Mac, average rates for a 30-year fixed-rate mortgage remain above 7%.

“The reacceleration of inflation and strength in the economy are keeping mortgage rates elevated,” Khater said.

Other home loans, such as adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs), are more directly linked to the Fed’s actions. ARMs typically adjust after an initial fixed-rate period, while HELOC rates adjust immediately. Currently, the average rate for a HELOC is 9.12%, the highest in 22 years, according to Bankrate.

“That HELOC is no longer low-cost debt and it warrants much greater emphasis on repayment than it has in a long time,” said Greg McBride, chief financial analyst at Bankrate.com.

Although auto loans are fixed, payments are increasing due to rising car prices and higher interest rates on new loans.

The average rate on a five-year new car loan is now 7.46%, the highest in 15 years, according to Bankrate.

Experts suggest that consumers with higher credit scores may be able to secure better loan terms or shop around for better deals. Choosing a loan offer with the lowest APR over the highest could save car buyers an average of $5,198, according to a recent report from LendingTree.

Federal student loan rates are fixed, so most borrowers are not immediately affected by the Fed’s actions. However, undergraduate students taking out new direct federal student loans are now paying 5.50%, up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.

For those with existing debt, interest is accruing again as of September 1. In October, millions of borrowers will make their first student loan payment after a three-year pause.

On the other hand, private student loans typically have a variable rate tied to Libor, prime, or Treasury bill rates, meaning borrowers are already paying more in interest. The amount of increase varies depending on the benchmark.

While the central bank does not have direct control over deposit rates, they tend to correlate with changes in the target federal funds rate. Savings account rates at major retail banks, which were historically low during most of the Covid pandemic, are now averaging around 0.43%, according to the Federal Deposit Insurance Corp.

Online savings accounts with higher yields are currently offering over 5% interest, the highest savers have seen in over 15 years, thanks in part to lower overhead expenses.

Despite this, only 22% of savers are earning 3% or more on their accounts, according to a Bankrate report.

“Deposit money in the right place and boost emergency savings to achieve returns exceeding 5%,” said McBride.

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