Federal Reserve meeting: Fed wants to keep interest rates stable, which could point to future cuts
While the Federal Reserve is expected to leave its key interest rate unchanged on Wednesday, US households will want to know if rate cuts are in store, which could have meaningful implications for their monthly budgets.
The central bank has already raised its benchmark interest rate to 5.25 to 5.50 percent, the highest level in more than two decades, in a series of hikes over the past two years. The aim was to rein in inflation, which has cooled significantly. Fed officials have kept rates steady since July as they continue to monitor the economy.
Interest rates have remained robust, meaning policymakers can take their time before cutting rates. But some banks have already started lowering the rates they pay to consumers, including on some certificates of deposit.
Here's a look at how different interest rates are affected by the Fed's decisions – and where they stand.
Credit cards
Credit card rates are closely tied to central bank actions, meaning consumers with revolving debt have seen these rates rise rapidly in recent years. (Increases usually occur within one or two billing cycles.) But don't expect them to drop as quickly.
“The urgency to pay off expensive credit card or other debt is not easing,” said Greg McBride, chief financial analyst at Bankrate.com. “Interest rates went up on the elevator, but they are going down on the stairs.”
That means consumers should prioritize repaying debts with higher costs and take advantage of zero percent and low interest rate offers when they can.
According to the Federal Reserve, the average interest rate on fixed-rate credit cards at the end of 2023 was 22.75 percent, up from 20.40 percent in 2022 and 16.17 percent at the end of March 2022, when the Fed began its series of rate hikes.
Car loans
Interest rates on car loans remain high, which, in combination with higher car prices, continues to put pressure on affordability. But that hasn't deterred buyers, many of whom have returned to the market after postponing their purchases for several years due to supplies being tight during the Covid-19 pandemic and later Russia's invasion of Ukraine.
The market will most likely normalize this year: the inventory of new vehicles is expected to increase, which could help lower prices and lead to better deals.
“Tips from the Fed that they have achieved their rate hike targets could be a sign that rates could be cut sometime in 2024,” said Joseph Yoon, a consumer insights analyst at Edmunds, an auto research firm. “Inventory improvements for manufacturers mean shoppers will have more choice, and dealers will need to earn sales from their customers, potentially with stronger discounts and incentives.”
According to Edmunds, the average interest rate on new car loans was 7.1 percent in December 2023, up from 6.7 percent in December 2022. Used car rates were even higher, with the average loan having an interest rate of 11.4 in December 2023 percent, up from 10.3 percent in December 2023. the same month of 2022.
Auto loans typically track the five-year Treasury note, which is influenced by the Fed's policy rate — but that's not the only factor determining how much you pay. A borrower's credit history, vehicle type, loan term and down payment are all factored into the rate calculation.
Mortgages
Mortgage rates have been volatile in 2023, with the average rate on a 30-year loan rising to 7.79 percent at the end of October before dropping about a point lower and stabilizing: the average rate on a mortgage with a term of 30 years was 6.69 percent as of 2023. Jan. 25, according to Freddie Mac, compared to 6.60 percent for an identical loan in the same week last year.
Yields on 30-year fixed-rate mortgages do not move with the Fed's benchmark, but instead typically track yields on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations about inflation, the Fed's actions and how investors respond.
Other home loans are more closely linked to central bank decisions. Home equity lines of credit and adjustable-rate mortgages — each of which has a variable interest rate — generally increase within two billing cycles after a change in Fed interest rates. The average interest rate on a home equity loan was 8.91 percent on January 24. according to Bankrate.comwhile the average home equity line of credit was 9.18 percent.
Student grants
Borrowers who have federal student loans are not affected by the Fed's actions because such debt has a major impact fixed interest determined by the government.
But every July, new federal student loans are priced based on the May auction of 10-year Treasury notes. And this one interest rates on loans have risen: Borrowers with federal student loans disbursed after July 1, 2023 (and before July 1, 2024) will pay 5.5 percent, compared to 4.99 percent for loans disbursed during the same period a year earlier. Just three years ago, interest rates were below 3 percent.
Graduate students who take out federal loans will also pay about half a point more than the rate a year earlier, or an average of about 7.05 percent, as will parents, up from an average of 8.05 percent.
Borrowers of private student loans have already seen interest rates rise due to previous rate hikes: both fixed and variable rate loans are tied to benchmarks that track the federal funds rate.
Economy vehicles
With the Fed's interest rate unchanged, savings account rates are expected to remain relatively stable. (A higher Fed rate often means banks will pay more interest on their deposits, but that doesn't always happen right away. They usually pay more when they want to raise more money.)
But now that interest rates may have peaked and may eventually head lower, some online banks have already started cutting rates on certificates of deposit, or CDs, which typically correspond to similarly dated government bonds. Earlier this month, for example, online banks Ally, Discover and Synchrony all cut rates on their 12-month CDs from 5.15 percent to 5.30 percent to 5 percent. Marcus now pays 5.25 percent, down from 5.50 percent.
“It's a good time to buy CDs,” says Ken Tumin, founder of DepositAccounts.com, part of LendingTree. “CD rates are already falling, and as we get closer to the first rate cut, they will only continue to fall.”
The average one-year CD at online banks was 5.35 percent on Jan. 1, up from 4.37 percent a year earlier, according to DepositAccounts.com.
The average return on an online savings account was 4.49 percent on January 1 DepositAccounts.com, compared to 3.31 percent a year ago. But the returns on money market funds offered by brokerage firms are even more attractive because they have more closely tracked the federal funds rate. The return on the Crane 100 Money Fund Indexwhich tracks the largest money market funds, was 5.17 percent on January 30.