Fed Interest Rate

The Fed's rate changes rippling through the economy affect your wallet and how you spend. They influence your savings, certificates of deposit, and rates on auto loans, credit cards, and HELOCs. The Fed wants to keep inflation from running too hot without sacrificing job growth.

The Federal Reserve’s most powerful tool for managing the economy is the interest rate. When it lowers this short-term borrowing rate, banks typically respond by lowering the rates they charge consumers for loans to buy houses, cars, and credit cards. When it raises this benchmark borrowing rate, it typically tries to keep inflation from spiraling out of control. This rate isn’t set by the Fed’s central bankers; instead, it is determined by market forces and is based on the overnight borrowing rate between banks that meet minimum reserve requirements. Banks lend to each other at this rate to meet the Fed’s minimum requirements, and it filters down into the rest of the economy.

It influences everything from savings account rates and CD yields to auto loan, credit card, and adjustable-rate mortgage (ARM) interest rates. It even influences federal student loan rates, although they’re pegged to 10-year Treasury yields rather than the Fed rate. The Fed’s ability to control the rate is its most important monetary policy tool, and it often makes headlines when it changes.

FED Interest Rate Hike
Fed Interest Rate 1

FED Interest Rate Hike 2024

The Federal Reserve on Wednesday increased interest rates by a quarter percentage point, making it the 11th time this economic cycle that officials have raised rates. This latest move pushes the upper bound of the central bank’s target rate to 5.25% to 5.50%, the highest level since 2001. Stocks rose on expectations that the hike might be the last for the year, as inflation has slowed from high levels that put pressure on businesses and consumers to spend.

Still, a majority of Fed officials expect another rate increase this year, and one is likely at the September meeting. When interest rates rise, borrowing money gets more expensive, and savings vehicles such as credit cards and online savings accounts pay higher yields. Consumers may also notice more expensive home loans and car payments, depending on their financing type. The Fed’s aggressive rate-hiking strategy has come under attack from Democratic lawmakers who warn that the central bank risks stifling growth and driving up prices that hurt families.

Stocks fell after the Fed’s decision, with investors interpreting it as a sign that the central bank doesn’t think the previous rate hikes have done enough to control inflation. That could lead to a recession in the next few years, and investors will be watching the next meeting in September for clues. Investors are still expecting the Fed to raise rates at least once more this year, but whether it does or doesn’t is going to be data-dependent, according to Fed chair Jerome Powell.

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