If you’ve ever heard that “the Fed is raising rates” or “rates are staying the same,” you might wonder what that actually means for your day-to-day finances. Does it affect your credit card? Your car loan? Your savings account?
Here’s a simple breakdown, with guidance from America First Federal Credit Union, to help make sense of interest rate changes and how they impact your wallet.
What is “the Fed” and what do they do?
“The Fed” is short for the Federal Reserve, and the group that makes interest rate decisions is called the Federal Open Market Committee, or FOMC.
Their job is to keep the economy on stable ground. They focus on two main goals:
- Control inflation by slowing spending when prices rise too quickly
- Support employment and economic growth by encouraging borrowing and investing when the economy slows
They do this by adjusting interest rates.
What rate does the Fed actually change?
The FOMC sets the federal funds rate, also known as the overnight rate. This is the interest rate banks charge each other for short-term loans.
While consumers don’t borrow at this exact rate, it acts as a foundation for many other rates in the economy, including:
- Credit card rates
- Auto loan rates
- Home equity lines of credit (HELOCs)
- Some savings and money market rates
- Short-term Treasury yields
How does this affect you?
In late January, the Fed chose to keep rates steady. When that happens, most financial institutions tend to hold their rates where they are, at least for the short term.
Here’s what rate changes typically mean for consumers:
Lending
- Auto loans: Higher rates usually mean higher monthly payments. Lower rates can reduce borrowing costs.
- Credit cards: These are often tied to the prime rate, so changes from the Fed can show up quickly in your interest charges.
- HELOCs: These typically move up or down along with the prime rate.
- Mortgages: Conventional mortgage rates are influenced more by long-term Treasury yields, so they don’t always move in step with the Fed’s short-term rate decisions.
Savings and deposits
- When rates rise, savings accounts, money markets, and certificates may offer higher yields, which can benefit savers.
- When rates fall, those returns may decrease, sometimes after a short delay.
In higher-rate environments, it may be more expensive to borrow, but it can also be a good time to focus on saving and earning dividends.
The big picture
The Fed raises or lowers rates to guide the economy:
- Rising rates can help slow inflation but make borrowing more expensive.
- Falling rates make loans cheaper, which can boost spending and economic activity.
Understanding these changes can help you make smarter decisions about when to borrow, when to save, and how to plan for the future.
This Finance Friday content is sponsored by and provided in partnership with America First Federal Credit Union.
