pp电子官网

What does the Federal Reserve do?

Behind the scenes, the Federal Reserve is quietly influencing your everyday life when it comes to borrowing, saving, and even spending. As the central bank of the United States, the Federal Reserve (or Fed) is responsible for managing the country鈥檚 monetary policy. Since its inception, the Fed has worked to steer the U.S. economy toward strong employment and stable prices.

To reach those goals, the Fed uses a powerful tool: the federal funds rate, or the short-term interest rate banks charge each other to lend funds overnight. By raising or lowering interest rates, the Fed tries to influence the cost of borrowing money, which can curb or boost inflation. When interest rates increase or decrease, the effects trickle down to you and the financial products you use daily, like credit cards, loans, and savings accounts.聽

The Federal Reserve raises and lowers rates in response to fluctuating economic conditions. Typically, the Fed prefers to make gradual rate changes to minimize any ripple effects. However, major economic shocks from events such as the pandemic or soaring inflation can spur the Fed to act more aggressively.

In 2008, when the economy plunged and unemployment spiked, the Fed dropped the federal funds rate to zero-0.25%. In 2022, to combat inflation, the Fed began to raise interest rates..

In mid-March 2022, the federal funds rate was 0.25-0.50%; by the end of July 2023, this rate had increased to 5.25-5.50%, .

A change to the federal interest rate鈥攚hether up or down鈥攃ould have a ripple effect in the same direction on everything from聽interest rates on CDs聽to rates on mortgages and even the prices of everyday goods. Over the same March 2022 – July 2023 time frame, , the average 30-year fixed-rate mortgage surged from 4.1% to 6.7%.

If the federal funds rate hasn鈥檛 really been on your radar, have no fear. What follows will help you more fully answer the question: How does the Federal Reserve interest rate affect me? Then, you鈥檒l be on your way to making the best money management decisions for your聽financial goals, and you鈥檒l have a better understanding of how to profit from falling interest rates (and rising ones).

What happens when the Fed cuts interest rates

One of the Fed鈥檚 goals with an interest rate cut is to make borrowing less costly. Translation: You could see lower interest rates on credit, which is good news if you have debt or are shopping for a loan to purchase a home or buy a new car.

Borrowing can become more attractive

John Norris, an economist and podcast host, says a Fed rate cut could be helpful to the average consumer. 鈥淚f history serves as a guide, the prime rate, or the interest rate lenders charge their most creditworthy customers, will fall by the same amount as the fed funds rate,鈥� he says. 鈥淭his means credit cards and home equity lines of credit (HELOCs) will be a little cheaper for consumers moving forward.鈥�

In a low-rate environment, you could see lower rates on:

• Credit cards:聽A Federal Reserve rate cut could translate to a lower minimum payment on credit cards and a lower cost to carry a balance from one month to the next. 鈥淐redit card users should always be on the lookout for lower variable rate formulas, and a rate cut or two is a perfect time to do a little homework when looking for new cards,鈥� Norris says.
  
• Mortgages:聽If the Fed lowers interest rates, homeowners with an adjustable-rate mortgage may experience a rate reduction since the rates for this type of mortgage typically track with the prime rate, which, in turn, is influenced by the federal funds rate. Of course, your interest rate is locked in if you have a fixed-rate mortgage. Prospective homeowners shopping for mortgages may start to see more competitive (i.e., lower) rates available to them.
  
• Home equity lines of credit:聽If you have a HELOC with a variable interest rate or are in the market for one as you look to聽save money on聽home repairs, you could see a rate decrease following a Fed rate cut, which would lower your monthly payments.
  
• Other Loans:聽For loans, a Fed rate cut could mean lower monthly payments and less interest paid out over the life of the loan. For example, you could see a lower monthly payment if you have a private student loan on a regular payment schedule. Lower borrowing costs can mean more money in your monthly budget to spend, save, or聽apply to your financial goal of choice.

Chad Rixse, director of financial planning at a wealth management firm, says that when rates are falling, it may be a good time to consider refinancing or consolidating existing debt, such as private student loans, home loans, and car loans. (Refinancing means replacing your existing loan with a new one at a lower rate. Consolidating means paying off multiple loans with a single new loan.)

But it can pay to do your homework. Riley Adams, a certified public accountant and founder of a personal finance website, warns that consumers should be mindful of how much rates have dropped to determine the value of refinancing or consolidating. Using mortgages as an example: 鈥淣o one should consider refinancing a mortgage after a 25-basis point (0.25%) cut in the rates because the associated costs and fees will probably outweigh any interest savings,鈥� Adams says. 鈥淚f rates move meaningfully lower, homeowners should be on the lookout for refinancing offers, assuming they have significant time remaining on their mortgage and can benefit from lower interest costs.”

Saving may become less lucrative

As interest rates fall, you may notice your savings accounts aren鈥檛 returning as much cash as they used to. That鈥檚 part of the give-and-take of interest rate changes. 鈥淏anks make money by making a spread between what they pay for deposits and what they charge on loans,鈥� Norris says. 鈥淲hen what they can charge on a loan goes down, it makes sense what they pay on deposits will eventually do so as well.”

To better navigate the ebb and flow of a falling interest-rate environment, you can adopt these strategies:

• Find a competitive savings account rate:聽Even though savings rates tend to fall when the Fed cuts interest rates, banks could still offer competitive rates. Online banks like pp电子官网^脪 can pass on savings through higher interest rates on their deposit accounts because they save money on the associated costs of owning and operating brick-and-mortar locations. The current rate on pp电子官网鈥檚 high-yield savings account is over five times the national savings average.¹
• Lock in a higher fixed rate:聽If you anticipate more Fed rate cuts in the future, consider savings vehicles with a rate you can lock in. Most聽Certificate of Deposit (CD) accounts will have fixed rates for their entire term, so if you open a 5-year CD, your savings will continue to earn the same interest regardless of future fed funds rate cuts. (With a variable-rate CD, you鈥檒l typically earn a percentage based on the difference between the interest rates at the beginning and end of your CD鈥檚 term.) CDs often come with a penalty if you withdraw funds before the account鈥檚 term ends, so they鈥檙e best used to hold savings you won鈥檛 need to access for that period.

Also, remember that rates are just one factor to consider. Fees for maintenance, specific transactions, and holding a minimum balance can put a dent in your interest earnings. Customer service and online and mobile banking experiences should also be on your list of considerations.

What rising interest rates mean for savers and borrowers

While borrowing gets more expensive when interest rates go up, higher interest rates also mean more attractive savings opportunities. 鈥淚f interest rates rise, savers benefit by possibly earning more interest on their bank deposits,鈥� says Adams.

If you鈥檙e wondering how to profit from rising interest rates, these savings vehicles could earn more interest:

• Savings accounts
• Certificates of Deposit (CDs)
• Money market accounts
• IRA CDs
• IRA savings accounts

You can take advantage of higher聽savings interest rates聽and get the most from your savings efforts by increasing the amount of money stashed in your interest-earning聽savings accounts. The higher the balance, the more you can earn over time.

How borrowers can react to rising rates

Despite these increased savings opportunities, a rising-rate environment presents challenges鈥攎ost notably, borrowing becomes more expensive. Though you can鈥檛 do anything to control the Fed鈥檚 interest rate changes, you can control how you react. Here are a few ways:

Take the long view

Bill Nelson, advisor and owner of a financial planning firm, believes a long-term plan should account for changes in rates. 鈥淓xpect interest rates to fluctuate,鈥� he says. He also suggests basing financial plans on your goals, not current events. 鈥淢ake decisions based on what you鈥檙e looking to accomplish with your money,鈥� Nelson says. He explains that your financial goals can help you determine where to save or invest. He tells clients to focus on the timeframe of their financial goal and their appetite for risk. That means the impact of the Fed funds rate is not necessarily part of the decision-making process.

If you鈥檙e focused on your goals and what you can control to achieve them鈥攍ike聽automating your savings聽to set aside a specific amount each month ahead of a large purchase鈥攖hen rate fluctuations may not dramatically impact your plan. Don鈥檛 lose sleep over changing interest rates. If you have specific questions about, for example,聽what the Fed rate hike means for your retirement, then save those for a discussion with a financial advisor.

Delay gratification to maximize gains

Nick True talks about how behavior and habits impact long-term wealth on his personal finance blog. The key? Being disciplined enough to stay on track, he says.

鈥淏y letting current rates dictate decisions, you鈥檙e chasing short-term wins and instilling overarching bad behavior,鈥� True says.

For example, say you empty your investment accounts (earmarked for long-term wealth building) to buy a home now because you鈥檙e worried that rising mortgage rates could increase how much you end up paying for it over time. That nearsighted strategy, however, could have far-reaching costs: You may miss out on the chance to earn returns on your investments. You鈥檒l also reset your savings timeline and may pass up on the power of聽compound interest, which works best over time.

Don’t panic

If you鈥檙e still worried about the ways the Fed interest rate could impact your finances, there are a few additional points to consider:

• Remember that rising interest rates won鈥檛 impact your existing fixed-rate loans. Your monthly payments on fixed-rate mortgages, car loans, and student loans will stay the same. If you have variable-rate loans and have noticed an increase in your payments, you may want to talk to your lender about consolidating, refinancing, or changing your loan terms.
• While your Annual Percentage Rate (APR) on credit cards may go up, the specific interest rate you receive if you apply for a new card also depends on factors like your credit score. And if you can pay your balance in full each month, a changing interest rate should have little impact.

How changing interest rates affect overall spending

Aside from borrowing and saving repercussions, the ripple effects of federal funds rate changes will likely extend to your purchasing power and everyday spending.

鈥淏y raising the federal interest rate, the Fed makes it more attractive for banks to hold extra capital,鈥� says James McGrath, a housing market expert and licensed real estate broker at a New York real estate firm. 鈥淲hen more money is locked away in vaults, there is less available to make loans and buy things, which slows growth and inflation.”

If inflation is kept to a minimum by the Fed鈥檚 benchmark interest rate, prices for everyday items you buy鈥攖hink groceries or personal care products鈥攈ave less room to increase. If a Fed rate change stabilizes prices on those items, you can put more money toward savings or paying off high-interest debt. Contrarily, McGrath says the Fed can lower rates to encourage spending. That puts more money into the economy, but it also opens the potential for prices to rise, he says.

Stay informed and stay the course amid falling or rising interest rates

Look at your overall financial situation against the interest-rate backdrop. The list of ways the Fed interest rate may affect you might differ from someone else鈥檚. Ask yourself how you can take advantage of rising or falling rates for maximum financial benefit when it comes to your borrowing, saving, and spending priorities. For example, if you鈥檝e been building a college savings fund for your children and the Fed hikes rates, you may be motivated to put more into savings to take advantage of higher returns. If you鈥檝e been waiting for the right moment to get a loan and the Fed cuts rates, it could be the time to jump in.

Note that the ways the Fed interest rate affects you may also depend on more than just one Fed rate change. 鈥淪mall changes don鈥檛 amount to significant differences over time,鈥� Adams says. 鈥淚t鈥檚 when a long-term rate increase or decrease path becomes the norm that consumers should pay more attention,鈥� he adds.

Above all, remember that rate increases and decreases are a normal part of what the Fed does to keep the U.S. economy working. 鈥淩emain calm and carry on,鈥� Rixse suggests. 鈥淒on鈥檛 let panic or negative emotions guide your decision-making.鈥�

Just like the Fed raises interest rates to help combat nationwide inflation, you have strategies to help your personal financial picture. Learn why inflation can impact your plans for retirement and how to factor rising rates into your savings plans.

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.

This article is for informational purposes only and is not intended as a substitute for professional advice. For specific advice about your unique circumstances, you may wish to consult a qualified professional, at your expense.

¹The APY for the Online Savings Account as of 05/31/2024 is more than five times the national average APY for interest bearing savings accounts with a balance of $500 as reported by Curinos as of 05/31/2024. National average is based on information regarding the top 50 banks (by deposit size) and may not include information from variations in regional pricing at such banks or information from products that may not be widely available to their customers. Rates were obtained from Curinos, who relies on the data from the banks it tracks and such information cannot be guaranteed. APYs are subject to change at any time.