What Fed rates mean for mortgages, credit cards and more

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Federal Reserve policymakers will announce their latest decision on interest rates on Wednesday, and although they are expected to keep rates steady, their assessments of the economy often move markets with implications for borrowers and savers.

The Fed last raised its benchmark rate, the federal funds rate, in July to a range of 5.25 to 5.5 percent. The series of rate hikes that began in March last year were aimed at reining in inflation, which has calmed but remains high, leading Fed officials to suggest they would keep rates high for a longer period of time.

This means credit card and mortgage costs may remain relatively high, making it more difficult for those who want to pay off debt – as well as for those looking to renovate their kitchen or buy a new car. Want to take a new loan. In recent weeks, long-term market rates affecting many types of consumer and business loans have moved higher, even as the Fed kept its key rate on hold.

“We were pretty screwed for a while because of the low rates, and it lulled us into a false sense of security in terms of the real cost of debt,” said Anna N’G-Conte, president of Re-Envision Wealth. A wealth management firm.

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

Credit card rates are closely tied to the Fed’s actions, meaning consumers with revolving credit have seen rates rise in the last year — and fast (the increases usually happen within one or two billing cycles).

The average credit card rate was 20.72 percent as of Oct. 25, according to Bankrate.com, up from about 16 percent in March last year, when the Fed initiated a series of rate hikes.

People with credit card debt should focus on paying it off and assume that rates will keep rising. Zero-percent balance transfer offers can help (they still do) when used carefully. Existence for those with good credit, but come with fees), or you can try to negotiate a lower rate with your card issuer, said Matt Schultz, chief credit analyst at LendingTree. His Research Found that such a tactic often works.

Experts say higher loan rates are driving down auto sales, especially in the used car market, as loans are more expensive and prices remain high. Qualifying for a car loan has also become more challenging than it was a year ago.

“There are affordability challenges in the auto market,” said Jonathan Smoke, chief economist at market research firm Cox Automotive.

According to Edmunds.com, the average rate on a new car loan in September was 7.4 percent, up slightly from the beginning of the year. Used car rates were even higher: The average loan rate in September was 11.4 percent, matching the high rate at the beginning of the year.

Car loans track 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, vehicle type, loan term and down payment all go into calculating that rate.

Rates on the 30-year fixed-rate mortgage do not move in line with the Fed’s benchmark rate, but instead typically track the yield on the 10-year Treasury bond, which is influenced by a number of factors including inflation, the Fed’s expectations. Activities and how investors react to all this.

Mortgage rates are at their highest level in more than two decades. According to Freddie Mac, the average rate on a 30-year mortgage was 7.79 percent as of Oct. 26, compared with 6.7 percent for the same loan in 2022 the same week.

Other home loans are more closely tied to the Fed’s moves. Home-equity credit lines and adjustable-rate mortgages – each of which have variable interest rates – typically increase within two billing cycles after a Fed rate change. The average rate on home-equity loans was 8.88 percent as of Oct. 25, up from 7.3 percent a year earlier, according to Bankrate.com.

Borrowers who already have federal student loans are not affected by the Fed’s actions because it carries the loans. fixed rate Determined by the government. (Payments on most of these loans have been paused for the past three years as part of pandemic relief measures, and became due again in October.)

But the price of batches of new federal student loans is determined each July, based on the 10-year Treasury bond auction in May. and they loan rates have climbed: Borrowers with federal graduate loans disbursed after July 1 (and before July 1, 2024) will pay 5.5 percent, up from 4.99 percent for loans disbursed a year earlier. Just three years ago, rates were below 3 percent.

Undergraduate students taking out federal loans will also pay about half a point more than a year ago, or an average of 7.05 percent, as will parents, who will pay an average of 8.05 percent.

Borrowers of private student loans have already seen rates rise due to increased interest rates. Both fixed and variable rate loans are tied to benchmarks that track the federal funds rate.

Savers seeking better returns on their money have had easier times: Rates on online savings accounts 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 multiple options to earn yields greater than 5 percent on their cash,” said Ken Tumin, founder of DepositAccounts.com, part of LendingTree.

Higher Fed rates often mean banks pay more interest on their deposits, although this does not always happen immediately. When they want to bring in more money they raise their rates.

The average yield on an online savings account was 4.4 percent as of Oct. 1, up from 2.1 percent a year earlier, according to DepositAccounts.com. But the yields on money market funds offered by brokerage firms are even more attractive because they more closely track the federal funds rate. The yield on the Crain 100 Money Fund Index, which tracks the largest money market funds, was recently at 5.19 percent.

Rates on certificates of deposit, which track similarly dated Treasury securities, are also moving higher. The average one-year CD at online banks was 5.18 percent as of Oct. 1, up from 3.15 percent a year earlier, according to DepositAccounts.com.

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