Interest rates influence our financial lives in numerous ways: Savers are now benefiting from higher-yielding bank accounts, while people carrying heavy revolving debt loads continue to be squeezed.
It’s been a year since interest rates reached a two-decade high, but they may soon begin to reverse course. The Federal Reserve is expected to hold its benchmark interest rate steady on Wednesday, while signaling that a cut is possible when policy-setting officials meet again in September.
The Fed has raised its key rate to 5.33 percent from near zero in a series of increases starting March 2022. The goal was to rein in inflation, which has since cooled considerably. Now, Fed officials want to be sure prices remain under control while considering its second objective, which is to keep a strong job market. If interest rates are elevated for too long, they risk weakening the employment picture.
The central bank uses interest rates to influence the broader economy. When policymakers raise rates, money becomes more expensive to borrow, which slows consumer demand. Conversely, lower rates may spur more spending, igniting economic growth.
But the direction of rates also has implications on consumers’ wallets. Here’s how different rates are affected by the Fed’s decisions — and where they stand.
Credit Cards
Credit card rates are closely linked to the central bank’s actions, which means that consumers with revolving debt have seen those rates rise quickly 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.
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 22.76 percent at the end of June, according to the Fed, up slightly from 22.16 percent a year earlier and 16.17 percent at the end of March 2022, when the central bank began its series of rate increases.
Car Loans
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.
“Manufacturers are not offering many low-rate loans, but lucky consumers can find some financing deals ahead of expected market-rate declines later this year,” Jonathan Smoke, chief economist at the market research firm Cox Automotive, said in a recent report.
The average rate on new-car loans was 7.3 percent in June, according to Edmunds, a car shopping website, up from 7.2 percent in the same month in 2023 and 5.2 percent in 2022. Used-car rates were even higher: The average loan carried an 11.5 percent rate in June, up from 11 percent in June 2023 and 8.3 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 consumers will pay. A borrower’s credit history, the type of vehicle, the loan term and the down payment are all baked into that rate calculation.
Mortgages
Mortgage rates have retreated a bit from their most recent peak. After reaching as high as 7.22 percent in early May, the average rate on a 30-year fixed-rate mortgage was 6.78 percent as of July 25, according to the mortgage-financing giant Freddie Mac. That’s up from 6.81 percent in the same week last year.
“Despite these lower rates, buyers continue to pause, as reflected in tumbling new and existing home sales data,” said Sam Khater, chief economist at Freddie Mac.
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 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 8.59 percent as of July 24, according to Bankrate, a consumer financial website, while the average home-equity line of credit was 9.17 percent.
Student Loans
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 recently rose 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 increased to 8.08 percent. And rates on PLUS loans — financing available to graduate students and parents of undergraduate students — rose 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.
Savings Vehicles
Individuals have been earning more on their savings, but if the Fed suggests that rate cuts are on the way, that could all begin to change. “Banks have a history of being proactive in cutting deposit rates when the Fed signals a forthcoming rate cut,” said Ken Tumin, founder of financial site DepositAccounts.com, part of the online loan marketplace LendingTree.
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.
Online institutions tend to price their savings accounts much more competitively than their brick-and-mortar counterparts, though some have already begun to dial down their rates.
The rates on certificates of deposit, which track similarly dated Treasury securities, have already dropped multiple times this year. Now may be the time to lock in the most attractive yields before they fall further.
The average one-year C.D. at online banks was 4.99 percent as of July 8, down from its peak yield of 5.35 percent in January, but up from 4.88 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 July 8, down only slightly from a peak of 4.49 percent in January, according to DepositAccounts.com, and up from 4.08 percent a year ago.
Yields on money-market funds offered by brokerage firms are even higher. The yield on the Crane 100 Money Fund Index, which tracks the largest money-market funds, was 5.13 percent on July 29.