After raising interest rates 10 times in the past 15 months, the Federal Reserve took a break on Wednesday and held interest rates steady — at least for now. But the cumulative effects of past rate hikes will continue to squeeze the budgets of debt-laden Americans, while rewarding those who have money to save.
The Federal Reserve has already raised its benchmark interest rate, the federal funds rate, to a range of 5 to 5.25 percent to contain inflation, which is showing signs of slowing down. But prices remain high — and the Fed could eventually decide to raise rates two more times this year, according to forecasts released by policymakers on Wednesday.
That means the cost of credit cards and mortgages could continue to rise, making it more difficult for people looking to pay off debt, as well as those looking to take out new loans to renovate their kitchen or buy a new car.
“We were very spoiled for a while with low rates, and that put us to sleep with a false sense of security in terms of what the true cost of debt might be,” said Anna N’Jie-Konte, president of Re-Envision Wealth , an asset manager.
Here’s how different rates are affected by the Fed’s decisions — and where they stand now.
Credit cards
Credit card rates are closely tied to the Fed’s actions, meaning consumers with revolving debt have seen those rates rise over the past year — and quickly (increases usually occur within one or two billing cycles).
According to Bankrate.com, the average credit card rate on June 3 was 20.44 percent, compared to about 16 percent in March last year, when the Fed began a series of rate hikes.
People with credit card debt should focus on paying it off and assume that rates will continue to rise. Zero percent balance transfer offers can help if used carefully (they still exist for people with good credit, but there are fees involved), or you can try to negotiate a lower rate with your card issuer, said Matt Schulz, lead credit analyst at LendingTree. His research showed that such a tactic often works.
Car loans
Higher loan rates have dampened car sales, particularly in the used car market, as loans are more expensive and prices remain high, experts said. Qualifying for car loans has also become more challenging than a year ago.
“The automotive market has affordability challenges,” said Jonathan Smoke, chief economist at Cox Automotive, a market research firm.
The average rate on new car loans was 7.1 percent in May, according to Edmunds.com 5.1 percent last year. Used car rates were even higher: the average loan rate was 11 percent in May, compared to 8.2 percent a year earlier.
Auto loans tend to follow the five-year Treasury bill, which is influenced by the Fed’s key rate — but that’s not the only factor that determines how much you pay. A borrower’s credit history, vehicle type, loan term, and down payment are all baked into that rate calculation.
mortgages
Interest rates on 30-year fixed-rate mortgages do not move in tandem with the Fed’s benchmark interest rate, but instead generally track yields on 10-year Treasury bonds, which are influenced by a variety of factors, including inflation expectations , the rate of the Fed actions and how investors react to them.
Mortgage rates were volatile. After rising above 7 percent at the end of October – for the first time since 2002 – mortgage rates fell to almost 6 percent in February, before rising again to 6.71 percent on June 8, according to Freddie Mac. The average rate for an identical loan in the same week in 2022 was 5.23 percent.
Other home loans are more closely tied to the Fed’s moves. Home equity lines of credit and adjustable-rate mortgages — each of which has a floating rate — generally increase within two billing cycles of a change in the Fed’s rates. According to Bankrate.com, the average rate on a home equity loan was 8.48 percent on June 7, compared to 4.45 percent a year ago.
Student grants
Borrowers who already have federal student loans are unaffected by the Fed’s actions because that debt has a flat rate set by the government. (Payments on most of these loans have been suspended for the past three years as part of a pandemic relief measure, and will resume by the end of the summer.)
But new batches of federal student loans are priced each July, based on the 10-year Treasury bond auction in May. And those borrowing rates have increased: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2024) pay 5.5 percent, up from 4.99 percent for loans disbursed a year earlier in the same period. paid. Just three years ago, rates were below 3 percent.
Graduate students who take out federal loans also pay about half a point more, or an average of about 7.05 percent, as do parents, an average of 8.05 percent.
Private student loan borrowers have already seen those rates rise thanks to the past increases. Both fixed and floating rate loans are tied to benchmarks that track the Federal Funds rate.
Save vehicles
Savers looking for a better return on their money have had an easier time: Rates on online savings accounts, along with one-year certificates of deposit, have reached their highest level in more than a decade. But the pace of those increases is slowing.
“Consumers now have several options for earning more than a 5 percent return on their money,” said Ken Tumin, founder of DepositAccounts.com, part of LendingTree.
An increase in the Fed’s policy rate often means that banks will pay more interest on their deposits, although this does not always happen immediately. They tend to raise their rates if they want to bring in more money.
The average return on an online savings account as of June 1 was 3.98 percent, according to DepositAccounts.com, up from 0.73 percent a year ago. But the money market fund returns offered by brokerage firms are even more attractive because they tracked the federal funds rate more closely. The return on the Crane 100 Money Fund Index, which tracks money market funds, was recently 4.91 percent.
Rates on certificates of deposit, which tend to track similar-maturity Treasury bills, have also risen. The average one-year CD at online banks was 4.86 percent on June 1, up from 1.49 percent a year earlier, according to DepositAccounts.com.
