American households hoping for interest rates to fall soon will have to wait a little longer.
The Federal Reserve is expected to keep interest rates on hold on Wednesday, at least until there are clear signs that inflation growth is slowing. But forecasters will be listening to comments from Fed Chairman Jerome H. Powell for clues about how long interest rates are likely to remain relatively high.
The central bank raised its key rate from near zero to 5.33% in a series of hikes between March 2022 and last summer, and has left it unchanged since. The goal was to tame inflation, which has calmed significantly but is still higher than the Fed would like to see, suggesting rates may remain higher than economists previously expected.
For those with money saved in high-yield savings accounts, higher interest rates translate into higher interest income, but for those with high credit card debt or those who have been put off by high interest rates, a lower interest rate environment is what they're hoping for.
“Whether you're looking for an auto loan, a credit card, a personal loan or any other type of loan, shopping around can make a big difference,” said Matt Schultz, an analyst at LendingTree, an online loan marketplace.
We explain how different interest rates are affected by the Fed's decisions and under what circumstances.
credit card
Credit card interest rates are closely tied to the actions of central banks, and consumers with revolving debt have seen interest rates rise sharply over the past few years. While interest rate increases typically occur within a billing cycle or two, you shouldn't expect interest rates to fall too quickly, even if they eventually do.
“The urgency to pay down high credit card debt and other debts hasn't decreased,” said Greg McBride, chief financial analyst at Bankrate. “Interest rates took the elevator up when they went up, but they'll take the stairs down when they go down.”
This means consumers should prioritize paying down higher-cost debt and take advantage of zero percent or low-interest balance transfer offers where possible.
The average interest rate on credit cards that charge interest was 22.63% at the end of March, according to the Federal Reserve, up from 20.92% a year earlier and 16.17% at the end of March 2022, when the Fed began its series of rate hikes.
Car Loans
Auto loan interest rates remain high, discouraging buyers and dampening demand among would-be car buyers, but automakers and dealers are starting to offer deeper discounts and other incentives, luring some buyers back into the market.
“There was some positive news on the sales front in May,” said Erin Keating, executive analyst at Cox Automotive. “Much of the sales growth was due to higher incentives and lower prices, which is good news for consumers concerned about inflation.”
According to Edmunds, the average interest rate for a new-car loan was 7.3% in May, up from 7.1% for 2023 and 5.1% for 2022. Rates for used-car loans are even higher, with the average loan rate being 11.5% in May, up from 11% for 2023 and 8.2% for 2022.
Auto loans tend to be tied to the yield on the five-year Treasury note, which is influenced by the Fed's key interest rate, but that's not the only factor that determines how much you pay: A borrower's credit history, the type of car, the loan term, and the down payment all factor into the interest rate calculation.
Housing loan
Mortgage rates also remain high, with the most popular mortgage rates exceeding 7% in mid-April and remaining roughly there since, making homeownership even more costly.
The average interest rate on a 30-year mortgage was 6.99% as of June 6, up from 6.71% during the same week last year, according to Freddie Mac.
The volatility continues: Rates rose to a high of 7.79% in late October but have since fallen about a percentage point and stabilized, at least temporarily.
“Interest rates are just below 7% and we expect them to decline moderately over the remainder of 2024,” said Sam Carter, chief economist at Freddie Mac. “For potential buyers looking to buy a home this year, the savings from waiting until rates drop may be small, but shopping around for the best rate can still be very beneficial.”
Interest rates on 30-year fixed-rate mortgages do not move in tandem with the Fed's benchmark interest rate, but rather are typically tied to the yield on the 10-year Treasury note, which is influenced by a variety of factors including inflation expectations, Fed actions and investor reaction.
Other mortgages are more closely tied to the central bank's decisions. Adjustable-rate home equity lines of credit and variable-rate mortgages typically rise within two billing cycles of a Fed rate change. As of June 6, the average interest rate on a home equity loan was 8.6%, while the average interest rate on a home equity line of credit was 9.18%, according to Bankrate.
Student Loans
Borrowers who already have federal student loans will not be affected by the Fed's action because those debts carry fixed interest rates set by the government.
But interest rates on new federal student loans are about to rise to their highest in a decade: Borrowers with federal undergraduate student loans taken out after July 1 (but through July 1, 2025) will see their interest rates rise to 6.53%, up from 5.5% for loans taken out the same time last year.
Interest rates on graduate and professional student loans will increase to 8.08 percent, and interest rates on PLUS loans, available to parents of undergraduates and graduate students, will increase to 9.08 percent.
The interest rate is determined in July using a formula based on the 10-year Treasury bond auction held in May each year.
Private student loan borrowers have already seen their rates rise due to past interest rate hikes. Both fixed-rate and adjustable-rate loans are tied to a benchmark that tracks the federal funds rate, the Fed's benchmark interest rate.
Savings vehicles
Savers typically benefit when the federal funds rate rises because it forces many banks to pay higher interest rates on savings accounts, especially if they want to attract more deposits. (Many banks make money from the difference between their cost of funds, such as deposits, and the interest rate they charge on loans.)
Online lenders tend to offer savings accounts with much more competitive interest rates than brick-and-mortar counterparts, but some have begun lowering their rates in anticipation of the Fed cutting rates this year. Term deposits, which tend to be pegged to similarly dated U.S. Treasury bills, have seen their rates cut multiple times already this year.
“Small increases and decreases in online deposit rates are likely to continue this year until the next Fed rate cut or hike approaches,” said Ken Tammin, founder of DepositAccounts.com.
The average yield on a one-year CD from online banks was 4.96 percent as of June 3, down from a high of 5.35 percent in January but up from 4.86 percent a year ago, according to DepositAccounts.com. But you can still find one-year CDs with yields above 5.25 percent.
Most online banks have kept interest rates on savings accounts relatively stable: The average yield on an online savings account was 4.40% as of June 3, down slightly from a peak of 4.49% in January but up from 3.98% a year ago, according to DepositAccounts.com.
Money-market funds offered by brokerages offer even more attractive yields because they track the federal funds rate more closely. The yield on the Crane 100 Money Fund Index, which tracks the largest money-market funds, was 5.12% as of June 11.
