How it affects your money

The Federal Reserve left its federal funds target rate unchanged for the second time in a row on Wednesday.

However, consumers may not get any relief from sky-high borrowing costs at the moment.

In total, Fed officials have raised rates 11 times in a year and a half, pushing the key interest rate to a target range of 5.25% to 5.5%, the highest rate in more than 22 years.

“Relief for households is unlikely to come soon, at least not directly in the form of a cut in the feed rate,” said Brett House, an economics professor at Columbia Business School.

The consensus among economists and central bankers is that interest rates will remain higher for longer, or until inflation moves closer to the central bank’s 2% target rate.

The federal funds rate, set by the central bank, is the interest rate at which banks borrow and lend to each other overnight. Although that is not the rate that consumers pay, the movements of the Fed still affect the loan and savings rates that they see every day.

To some extent, many households have been shielded from the Fed’s rate hikes so far, House said. “They locked into fixed rate mortgages and auto finance before the hike cycle started, in some cases at the lowest rates during the pandemic.”

However, higher rates have a big impact on anyone tapping a new loan for big-ticket items like a home or car, he said, and especially for credit card holders who carry balances.

Here’s a breakdown of how it works.

Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark. As the federal funds rate rose, so did the prime rate, and credit card rates followed suit.

Credit card annual percentage rates are now over 20%, on average – an all-time high. In addition, with most people feeling pressured by higher prices, more cardholders carry month-to-month debt.

“Increasing debt is a problem,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics.

“Consumers are taking on a lot of credit card debt and paying very high interest rates,” Sohn said. “That’s not good for the long-term economic outlook.”

For those borrowers, “interest rates that stay higher for a longer period of time reinforces the urgency of incurring and paying off costly credit card debt,” said Greg McBride, principal financial analyst at Bankrate.com.

Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost significant purchasing power, in part due to inflation and policy shifts. the Deer.

The average rate for a 30-year fixed-rate mortgage is up to 8%, the highest rate in 23 years, according to Bankrate.

“Buying activity has slowed to a virtual halt, affordability remains a major hurdle for many and the only way to deal with lower rates and more inventory,” said Sam Khater, Freddie Mac’s chief economist .

Other home loans are more closely tied to the actions of the Fed. Adjustable rate mortgages and home equity lines of credit, or HELOCs, are tied to the prime rate. Most ARMs change once a year after the initial fixed period. But the HELOC rate changes instantly. Now, the average rate for a HELOC is nearly 9%, the highest rate in more than 20 years, according to Bankrate.

However, Americans are sitting on more than $31.6 trillion of home equity, according to Jacob Channel, senior economist at LendingTree. “As a result, many homeowners could benefit from accessing the equity they’ve built up with a home equity loan or line of credit. “

Federal student loan rates are also fixed, so most borrowers are not immediately affected by the Fed’s moves. But undergraduate students who take out federal student loans now only pay 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.

The government sets the annual rates on these loans once a year, based on the 10-year Treasury.

If the 10-year yield stays near 5%, federal student loan interest rates could rise again when they reset in the spring, costing students even more in interest.

“Borrowers are being squeezed, but the flip side is that savers are benefiting,” McBride said.

Although the Fed does not directly influence investment rates, the output tends to be related to changes in the federal funds rate target. Savings account rates at some of the biggest retail banks, which were near rock bottom during most of the Covid pandemic, are now up to 0.46%, on average, according to the Federal Deposit Insurance Corp.

“Average rates have increased significantly in the past year, but they are still very low compared to online rates,” said Ken Tumin, founder and editor of DepositAccounts.com.

Some of the best online savings account rates now pay more than 5%, according to Bankrate, which is the most that have been able to earn in almost two decades.

“Savings are now earning more than inflation, and we haven’t been able to say that for a long time,” McBride said.

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