The Federal Reserve is expected to keep its key interest rate steady on Wednesday, but U.S. households will be listening for clues about whether rate cuts are on the horizon, which could have meaningful implications for their monthly budgets and affect major purchasing decisions.
The central bank has raised its key rate to a range of 5.25 to 5.50 percent, the highest level in more than two decades, in consecutive hikes over the past two years. The target was to contain inflation, which peaked at 9.1 percent in 2022.
Central bank officials have kept rates unchanged since July as they continue to monitor the economy. With inflation still somewhat stubborn — inflation has danced around 3.2 percent for five months — policymakers are unlikely to take rate cuts too quickly.
However, many banks have already begun to anticipate possible cuts by reducing fees they pay to consumers, including some certificates of deposit.
Here's how different rates are affected by the Fed's decisions — and where they stand.
Credit cards
Credit card rates are closely tied to the Fed's actions, meaning consumers with revolving credit have seen those rates rise rapidly over the past two years. Increases usually occur within one or two billing cycles, but don't expect them to decrease too quickly.
“The rush to pay off high-cost credit cards or other debt has not abated,” said Greg McBride, chief financial analyst at Bankrate.com. “Interest rates went up the elevator, but they're going down the stairs.”
That means consumers should prioritize paying off high-cost loans and take advantage of zero-percent and low-rate balance transfer offers when they can.
The average rate on credit cards with rated interest was 22.75 percent at the end of 2023, according to the Federal Reserve, 20.40 percent in 2022 and 16.17 percent at the end of March 2022, when the Fed begins its next round of rate hikes.
Car loans
Auto loan rates remain elevated, which, along with higher car prices, continues to squeeze affordability. But that hasn't deterred buyers, many of whom have returned to the market after putting off purchases for years due to inventory restrictions during the Covid-19 pandemic and later Russia's invasion of Ukraine.
The market is likely to return to normal this year: New vehicle inventories are expected to increase, which will ease pricing and lead to better deals.
“The Fed's hints that they've reached their rate hike targets could be a sign that rates could be cut at some point in 2024,” said Joseph Yoon, consumer insights analyst at Edmonds, an auto research firm. “Inventory improvements for manufacturers mean shoppers will have more choice, and dealers will need to earn their customers' business with stronger discounts and incentives.”
The average rate on new car loans was 7.1 percent in February EdmondsBoth the month before 2023 and February 2023 are up slightly from 7 percent. Used car rates were even higher: The average loan was 11.9 percent in February 2024, up from 11.3 percent in the same month in 2023.
Car loans tend to track the yield on the five-year Treasury note, which is affected by the Fed's key rate — but that's not the only factor that determines how much you'll pay. The borrower's credit history, type of vehicle, loan term and down payment all factor into that rate calculation.
mortgages
Mortgage rates remained volatile through 2023, with the average 30-year fixed-rate loan peaking at 7.79 percent in late October, down a point to stabilize: The average 30-year mortgage rate as of March 14 was 6.74 percent. That compares with 6.6 percent in the same week last year, according to Freddie Mac.
“Mortgage rates remain high as the market contends with sticky inflationary pressures,” Freddie Mac Chief Economist Sam Kader said in a statement last week. “In this environment, there is a good chance that rates will remain high for a long time.”
Rates on 30-year fixed-rate mortgages don't move in tandem with the Fed's benchmark, but instead typically track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including inflation, the Fed's expectations. Actions and how investors react.
Other home loans are more closely linked to the central bank's decisions. Home equity loans and adjustable-rate mortgages — each with variable interest rates — typically go up within two billing cycles after a change in the Fed's rates. The average rate for home equity loans was 8.66 percent as on March 13. According to Bankrate.comMeanwhile, the average home equity loan was 8.98 percent.
Student loans
Borrowers who hold federal student loans are not affected by the Fed's actions because such loans are a Fixed rate Set up by Govt.
But new federal student loans are priced each July based on the May 10-year Treasury bond auction. And that Loan rates have risen: Recipients of federal undergraduate loans after July 1, 2023 (before July 1, 2024) will pay 5.5 percent, up from 4.99 percent for loans issued during the same period a year ago. Three years ago, rates were less than 3 percent.
Graduate students receiving federal loans will also pay a half-point higher than the rate a year ago, or an average of 7.05 percent, with parents paying an average of 8.05 percent.
Borrowers of private student loans have already seen rates climb because of previous rate increases: both fixed- and variable-rate loans are tied to benchmarks that track the federal funds rate.
Storage vehicles
Even as the central bank's benchmark rate remains unchanged, many online banks have started rolling back the fees they charge to consumers.
Indeed, with rates now peaking and likely to eventually decline, many online banks have already cut rates on certificates of deposit several times this year, which tend to track similarly dated Treasury securities. For example, online banks including Ally, Discover and Synchrony all recently cut their rates on 12-month CDs to less than 5 percent. Marcus now pays 5.05 percent from 5.50 percent, while Barclays cut its rate to 5 percent from 5.3 percent.
“CD rates are already going down, and as we get closer to the first rate cut, they will go down even more,” said Ken Dumin, founder of DepositAccounts.com, part of LendingTree.
The average one-year CD at online banks was 5.02 percent as of March 1, down from its peak yield of 5.35 percent in January, but up from 4.56 percent a year ago, according to DepositAccounts.com.
The average yield on an online savings account was 4.44 percent as of March 1, down slightly from a peak of 4.49 percent in January and 3.52 percent a year ago, according to DepositAccounts.com. But the yields on money-market funds offered by brokerage firms are even more attractive because they track the federal funds rate more closely. yield on that day Crane 100 Money Financial IndexIt was 5.14 percent on March 19, tracking the largest money market funds.
