The Federal Reserve is likely to hike interest rates again. What that means for you

The Federal Reserve is widely expected to announce its eighth consecutive rate hike at this week’s policy meeting. 

This time, Fed officials likely will approve a 0.25 percentage point increase as inflation starts to ease, a more modest pace compared with earlier super-size moves in 2022.

Still, any boost in the benchmark rate means borrowers will pay even more interest on credit cards, student loans and other types of debt. On the flip side, savers could benefit from higher yields.

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“The good news is that the worst is over,” said Yiming Ma, an assistant finance professor at Columbia University Business School.

The U.S. central bank is now knee-deep in a rate hike cycle that has raised its benchmark rate by 4.25 percentage points in less than a year.

Although inflation is still above the Fed’s 2% long-term target, pricing pressures have “come down substantially and the pace of rate hikes is going to slow,” Ma said.

The goal remains to tame runaway inflation by increasing the cost of borrowing and effectively pump the brakes on the economy.

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Whether directly or indirectly, higher Fed rates influence borrowing costs for consumers and, to a lesser extent, the rates they earn on savings accounts.

Here’s a breakdown of how it works:

Credit cards

Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.

After rising at the steepest annual pace ever, the average credit card rate is now 19.9%, on average — an all-time high. Along with the Fed’s commitment to keep raising its benchmark to combat inflation, credit card annual percentage rates will keep climbing, as well. 

Households are also increasingly leaning on credit to afford basic necessities, since incomes have not kept pace with inflation. This makes it even harder for the growing number of borrowers who carry a balance from month to month.

“Credit card balances are rising at the same time credit card rates are at record highs; that’s a bad combination,” said Greg McBride, chief financial analyst at Bankrate.com.

If you currently have credit card debt, tap a lower-interest personal loan or 0% balance transfer card and refrain from putting additional purchases on credit unless you can pay the balance in full at the end of the month and even set some money aside, McBride advised.

Mortgages

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 considerable purchasing power, partly because of inflation and the Fed’s policy moves.

“Despite what will likely be another rate hike from the Fed, mortgage rates could actually remain near where they are over the coming weeks, or even continue to trend down slightly,” said Jacob Channel, senior economist for LendingTree.

The average rate for a 30-year, fixed-rate mortgage currently sits at 6.4%, down from mid-November, when it peaked at 7.08%.

Still, “these relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel added.

Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.

Auto loans

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.

The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% at the beginning of 2022.

“Elevated pricing coupled with repeated interest rate increases continue to inflate monthly loan payments,” Thomas King, president of the data and analytics division at J.D. Power, said in a statement.

Car shoppers with higher credit scores may be able to secure better loan terms or look to some used car models for better pricing.

Student loans

Federal student loan rates are also fixed, so most borrowers won’t be affected immediately by a rate hike. The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-21. Any loans disbursed after July 1 will likely be even higher.

Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.

For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.

Savings accounts

On the upside, the interest rates on some savings accounts are higher after a run of rate hikes.

While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.33%, on average.

Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.

“If you are shopping around, you are finding the best returns since the great financial crisis. If you are not shopping around, you are still earning next to nothing,” McBride said.

Still, any money earning less than the rate of inflation loses purchasing power over time, and more households have less set aside, in general.

“The best advice is pick up a side hustle to bring in some additional income, even if it’s just temporary, and pay yourself first with a direct deposit into your savings account,” McBride advised. “That’s how you are going to create the pathway to be able to save.” 

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