How Fed Rates Influence Mortgages, Credit Cards and More


American households who are hoping interest rates will soon decline will have to wait a bit longer.

The Federal Reserve is expected to keep its benchmark interest rate unchanged on Wednesday, at least until there are clearer signs that inflation is growing more slowly. But forecasters will be listening to Jerome H. Powell, the Fed chair, for any clues about how much longer they expect to keep rates at relatively high levels.

The central bank has raised its key interest rate to 5.33 percent from near zero in a series of increases between March 2022 and last summer, and they’ve remained unchanged since then. The goal was to tamp down inflation, which has cooled considerably, but it is still higher than the Fed would like, suggesting that interest rates could remain high for longer than economists had previously expected.

For people with money stashed away in higher-yielding savings accounts, a continuation of elevated rates translates into more interest earnings. But for people saddled with high cost credit card debt, or aspiring homeowners who have been sidelined by higher interest rates, a lower-rate environment can’t come soon enough.

“Shopping around, whether you’re looking for an auto loan, a credit card, a personal loan or any other type of loan, can make a huge difference,” said Matt Schulz, an analyst at LendingTree, an online loan marketplace.

Here’s how different rates are affected by the Fed’s decisions — and where they stand.

Credit card rates are closely linked to the central bank’s actions, which means that consumers with revolving debt have seen those rates quickly rise over the past couple of years. Increases usually occur within one or two billing cycles, but don’t expect them to fall quite as rapidly even when rates eventually decline.

“The urgency to pay down high-cost credit card or other debt is not diminished,” said Greg McBride, chief financial analyst at Bankrate. “Interest rates took the elevator going up, but they’re going to take the stairs coming down.”

That means that consumers should prioritize repayment of higher-cost debt and take advantage of zero-percent and low-rate balance transfer offers when they can.

The average rate on credit cards with assessed interest was 22.63 percent at the end of March, according to the Federal Reserve, compared with 20.92 percent a year earlier and 16.17 percent at the end of March 2022, when the Fed began its series of rate increases.

Auto loan rates remain elevated, which has squeezed affordability and dampened demand among would-be car buyers. But automakers and dealerships have begun offering more discounts and other incentives, which has lured some buyers back to the market.

“In May, we saw some positive news on the sales front,” said Erin Keating, executive analyst for Cox Automotive. “A lot of those sales gains were juiced by higher incentives and lower prices, which is good news for consumers worrying about inflation.”

The average rate on new-car loans was 7.3 percent in May, according to Edmunds, up from 7.1 percent in 2023 and 5.1 percent in 2022. Used-car rates were even higher: The average loan carried an 11.5 percent rate in May, up from 11 percent in 2023 and 8.2 percent in 2022.

Car loans tend to track with the yield on the five-year Treasury note, which is influenced by the Fed’s key rate — but that’s not the only factor that determines how much you’ll pay. A borrower’s credit history, the type of vehicle, the loan term and the down payment are all baked into that rate calculation.

Mortgage rates have also remained elevated: The most popular loan crossed the 7 percent mark in mid-April and has largely maintained that stance ever since, making homeownership an even costlier proposition.

The average 30-year mortgage rate was 6.99 percent as of June 6, according to Freddie Mac, compared with 6.71 percent in the same week last year.

It’s been a volatile ride. Rates climbed as high as 7.79 percent in late October before dropping about a point lower and stabilizing — at least temporarily.

“Rates are just shy of 7 percent, and we expect them to modestly decline over the remainder of 2024,” said Sam Khater, Freddie Mac’s chief economist. “If a potential buyer is looking to buy a home this year, waiting for lower rates may result in small savings, but shopping around for the best rate remains tremendously beneficial.”

Rates on 30-year fixed-rate mortgages don’t move in tandem with the Fed’s benchmark, but instead generally track with the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations about inflation, the Fed’s actions and how investors react.

Other home loans are more closely tethered to the central bank’s decisions. Home-equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the Fed’s rates. The average rate on a home-equity loan was 8.6 percent as of June 6, according to Bankrate, while the average home-equity line of credit was 9.18 percent.

Borrowers who already hold federal student loans are not affected by the Fed’s actions because such debt carries a fixed rate set by the government.

But rates on new federal student loans are about to rise to their highest level in a decade: Borrowers with federal undergraduate loans disbursed after July 1 (but before July 1, 2025) will pay 6.53 percent, up from 5.5 percent for loans disbursed in the same period a year before.

Rates on loans for graduate and professional students will increase to 8.08 percent. And rates on PLUS loansfinancing available to parents of undergraduate students as well as to graduate students — will increase to 9.08 percent.

The rates are priced each July using a formula that is based on the 10-year Treasury bond auction in May.

Borrowers of private student loans have already seen rates climb because of previous rate increases: Both fixed- and variable-rate loans are linked to benchmarks that track the federal funds rate, the Fed’s benchmark rate.

Savers usually benefit when the federal funds rate is higher because many banks pay more on their savings accounts — particularly if they want to attract more deposits. (Many banks earn money on the difference between their cost of funds, like deposits, and the interest rate they charge on loans.)

Online institutions tend to price their savings accounts much more competitively than their brick-and-mortar counterparts, though some have begun to dial down their rates because they had expected the Fed to cut rates at some point this year. Certificates of deposit, which tend to track similarly dated Treasury securities, have already seen their rates drop multiple times this year.

“Small gains and declines of online deposit rates will likely continue this year until we approach the next Fed rate cut or rate hike,” said Ken Tumin, founder of DepositAccounts.com.

The average one-year C.D. at online banks was 4.96 percent as of June 3, down from its peak yield of 5.35 percent in January, but up from 4.86 percent a year earlier, according to DepositAccounts.com. But you can still find one-year C.D.s with yields of more than 5.25 percent.

Most online banks have held their savings account rates relatively steady: The average yield on an online savings account was 4.40 percent as of June 3, down only slightly from a peak of 4.49 percent in January, according to DepositAccounts.com, and up from 3.98 percent a year ago.

Yields on money-market funds offered by brokerage firms are even more alluring because they’ve tracked the federal funds rate more closely. The yield on the Crane 100 Money Fund Index, which tracks the largest money-market funds, was 5.12 percent on June 11.



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