by While the Federal Reserve is expected to leave its key interest rate unchanged on Wednesday, American households will want to know if rate cuts are on the horizon, which could have significant implications for their monthly budgets.
The central bank has already raised its benchmark rate to between 5.25 and 5.50 percent, the highest level in more than two decades, in a series of increases over the past two years. The goal was to curb inflation, which has cooled considerably. Federal Reserve officials have kept rates steady since July as they continue to monitor the economy.
It has remained solid, meaning authorities could take their time before resorting to rate cuts. But some banks have already begun reducing the rates they pay consumers, including on some certificates of deposit.
Here’s how the Federal Reserve’s decisions affect different rates and where they stand.
Credit cards
Credit card rates are closely tied to central bank actions, meaning consumers with revolving debt have seen those rates rise rapidly in recent years. (Increases generally occur within one or two billing cycles.) But don’t expect them to go down so quickly.
“The urgency to pay off credit cards or other high-cost debt is not diminishing,” said Greg McBride, chief financial analyst at Bankrate.com. “Interest rates went up the elevator, but they will go down the stairs.”
That means consumers should prioritize paying off higher-cost debt and take advantage of zero- and low-rate balance transfer offers when they can.
The average rate on assessed interest credit cards was 22.75 percent at the end of 2023, according to the Federal Reserve, compared with 20.40 percent in 2022 and 16.17 percent at the end of March 2022, when the Federal Reserve began its series of rate increases.
Car Loans
Auto loan rates remain high, which, coupled with higher auto prices, continues to limit affordability. But that has not deterred buyers, many of whom have returned to the market after postponing purchases for several years due to inventories that had been limited during the Covid-19 pandemic and later by the Russian invasion of Ukraine. .
The market will most likely normalize this year: new vehicle inventory is expected to increase, which may help lower prices and lead to better deals.
“The Fed’s hints that they have achieved their rate-hike goals could be a sign that rates may be lowered sometime in 2024,” said Joseph Yoon, consumer insights analyst at Edmunds, a research firm. automotive. “Inventory improvements for manufacturers mean buyers will have more choices and distributors will have to earn their customers’ business, potentially with greater discounts and incentives.”
The average rate on new car loans was 7.1 percent in December 2023, according to Edmunds, up from 6.7 percent in December 2022. Rates on used cars were even higher: The average loan had a rate of 11.4 percent in December 2023, compared to 10.3 percent in the same month of 2022.
Auto loans tend to follow the five-year Treasury note, which is influenced by the Federal Reserve’s key rate, but that’s not the only factor that determines how much you’ll pay. The borrower’s credit history, vehicle type, loan term, and down payment are included in the rate calculation.
Mortgages
Mortgage rates were volatile in 2023, with the average rate on a 30-year fixed loan rising as high as 7.79 percent in late October before falling about one point and stabilizing: Average rate on a 30-year mortgage It was 6.69 percent in 2023. Jan. 25, according to Freddie Mac, compared to 6.60 percent for an identical loan in the same week last year.
Rates on 30-year fixed-rate mortgages do not move in lockstep with the Federal Reserve’s benchmark, but rather generally follow 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 mortgage loans are more closely linked to central bank decisions. Home equity lines of credit and adjustable-rate mortgages, each of which have variable interest rates, generally increase within two billing cycles after a change in Federal Reserve rates. The average rate on a home equity loan was 8.91 percent as of January 24. according to Bankrate.comwhile the average home equity line of credit was 9.18 percent.
Student loans
Borrowers who hold federal student loans are not affected by the Federal Reserve’s actions because such debt carries a fixed interest rate set by the government.
But prices for new batches of federal student loans are set each July based on the auction of 10-year Treasury bonds in May. and those loan rates have risen: Borrowers with federal student loans disbursed after July 1, 2023 (and before July 1, 2024) will pay 5.5 percent, up from 4.99 percent for loans disbursed in the same period of the previous year. Just three years ago, rates were below 3 percent.
Graduate students taking out federal loans will also pay about half a point more than the previous year’s rate, or about 7.05 percent on average, as will parents, at 8.05 percent on average.
Private student loan borrowers have already seen rates rise due to previous rate increases: Both fixed-rate and variable-rate loans are tied to benchmarks that track the federal funds rate.
Saving Vehicles
With the Federal Reserve’s benchmark rate unchanged, savings account rates are expected to remain relatively stable. (A higher Fed rate often means banks will pay more interest on your deposits, but that doesn’t always happen right away. They tend to pay more when they want to make more money.)
But now that rates may have peaked and could eventually decline, some online banks have already begun reducing rates on certificates of deposit, or CDs, which tend to match Treasury securities with similar dates. Earlier this month, for example, online banks Ally, Discover and Synchrony cut rates on their 12-month CDs to 5 percent, from 5.15 percent to 5.30 percent. Marcus now pays 5.25 percent, down from 5.50 percent.
“It’s a good time to get into CDs,” said 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 fall further.”
The average one-year CD at online banks was 5.35 percent as of Jan. 1, up from 4.37 percent a year earlier, according to AccountsDeposito.com.
The average yield on an online savings account was 4.49 percent as of Jan. 1, according to AccountsDeposito.com, up from 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 performance on Crane 100 Money Fund Indexwhich tracks the largest money market funds, was 5.17 percent on January 30.
