Federal Reserve maintains the federal funds rate for the third time in a row, but forecasts it will lower the rate three times in 2024: What do changes in the Fed rate mean for you?

A Credit Karma news explainer


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The Federal Open Market Committee decided to maintain the current interest rate at its December 12-13 meeting, marking the third consecutive meeting in which the committee voted to leave rates unchanged. Federal Reserve officials did, however, forecast three rate decreases for 2024, with the median forecast showing the federal funds rate at 4.6% by the end of 2024. In the meantime, the Federal Reserve’s new target range for the federal funds rate holds at 5.25% to 5.5% — the highest in 22 years.

Interest rate increases can be painful for many Americans, but the Fed chose to raise rates in 2022 and 2023 to combat inflation.

Read on for a detailed breakdown of recent Fed rate hikes and how they could be affecting your finances.

Reasons for the recent Fed rate hikes

According to notes from all its meetings in 2022, the Fed wants to “achieve maximum employment and inflation at the rate of 2% over the longer run.”

According to the Bureau of Labor Statistics, the year-over-year inflation rate from November 2022 to November 2023 was 3.1%.

Federal law requires financial institutions to keep a certain percentage of their customers’ money on hand, or “in reserve.” Sometimes a bank needs to borrow money from another financial institution to maintain the federally required reserve level. The federal funds rate (often shortened to fed funds rate) is an interest rate charged on overnight interbank lending to allow banks to have the correct reserve levels.

When banks lend to one another, they are taking part in what’s called the federal funds market. Hence, the name federal funds rate.

As rates increase, it becomes more costly for people to borrow money, and they spend less. Product demand then goes down, which, typically, then leads to a reduction in inflation.

History of Fed rate hikes

The current effective fed funds rate of 5.33% is low in comparison to historical levels.

The notoriously high interest rates of the late 1970s and early 1980s make the current Fed funds rate look like nothing. During the week of July 8, 1981, the effective Fed funds rate reached 19.93%. The corresponding 30-year fixed rate mortgage rate average was 16.79% — reaching a peak of 18.63% the week of Oct. 9, 1981.

After the fed funds rate peaked in the early 1980s, rates have mainly been on a decline until now. The 2022 rate hikes were surprising because they came in quick succession, and the increments of increase were larger than usual. Additionally, Americans got used to years of near-zero interest rates in the wake of the housing crash and Great Recession.

How do Fed rate hikes affect you?

Most Federal Reserve rate increases end up affecting consumers. Your credit card interest rate might rise a bit. Borrowers with a fixed-rate mortgage loan won’t see its interest rate rise, but folks applying for a new mortgage might expect to see higher rates. Similarly, auto loan rates may go up as well.

Although loan rates often rise when the Fed rate increases, the good news is that interest rates on bank accounts tend to rise as well. That includes most basic savings account interest rates. We break it all down below.

Fed rate hike impact on mortgage rates

Mortgage rates tend to mirror changes in the fed funds rate, but aren’t perfectly correlated.

For instance, after announcing a rate hike targeting a range of 5% to 5.25% in the May 3-4, 2023 Fed meeting, the weekly effective fed funds rate rose from 4.83% to a new rate of 5.08%. But the average weekly 30-year fixed rate mortgage rate dropped.  

Most folks with mortgages have a fixed rate, so the fed funds rate change isn’t likely to affect them. People with adjustable-rate mortgages and new borrowers are more likely to be affected. If you fall into either one of these categories, it’s worth considering whether you believe rates will continue to rise. If you do, it might be worth considering refinancing if you have an adjustable-rate mortgage. If you’re thinking about buying and you think rates will continue to rise, you may want to strike before rates rise more. If, on the other hand, you think rates will go down, it may be worth waiting.

Fed rate hike impact on credit card rates

A Fed interest rate hike also affects interest rates on credit cards. According to the Federal Reserve, the average credit card interest rate was 21.19% in August 2023. That’s up from an average credit card rate of 20.84% from the second quarter of 2023. This indicates that a Fed rate hike might have an impact on your credit card interest rates.

While Fed rate hikes in 2022 and 2023 likely induced a rise in credit card interest rates, credit card rates have actually been higher-than-average for some years now. This is mainly due to Fed rate hikes between 2016 and 2019. By contrast, the average credit card interest rate was less than 13% from May 2011 through May 2017, a period when the average fed funds rate was lower.

Most credit cards have variable interest rates that might be affected by the rise in the fed funds rate. If you have a credit card, this could be a good time to try to pay down your credit card debt as aggressively as possible before interest rates increase more. Additionally, you may consider taking advantage of your card’s grace period (if you have one) to avoid interest payments.

Fed rate hike impact on auto loan rates

When it comes to auto loans, a Fed rate hike could affect auto loan interest rates, but the relationship between the two is complex. Typically, a Fed rate hike can cause a rise in auto loan rates, but auto loan rates can also be high without any Fed interest rate hikes going on.

For example, the average auto loan rate for a 60-month loan rose from 7.81% in the second quarter of 2023 to 7.88% in August 2023, reflecting the Fed rate hikes of May and July. However, during a period when the effective Fed funds rate was low — 0.06% in May 2021 — the average 60-month term auto loan rate was 5.05%.

Fed rate hike impact on savings interest rates

Fortunately, there can also be positive effects from Fed rate hikes. Generally, a Fed interest rate hike means an increase in the average savings account interest rate.

Looking at Federal Reserve data confirms this. From May 2021 to 2022, the average savings account interest rate was 0.06%. The Fed rate hikes over the past year have increased the average national savings account interest rate to 0.46% in November. That may not sound like much, but 0.46% is nearly eight times higher than 0.06%, so you could be earning more interest on the money you have in a savings account. Now could be a good time to open a high-yield savings account and move your money from accounts that earn less interest. With an uncertain economic future, it may not be a bad time to sock more away in your savings.

When is the next Federal Open Market Committee meeting?

To stay up to date on the latest rates, keep the Fed meeting schedule in mind. The next Fed meeting on interest rates will be held September 19-20, 2023. Whether the Fed will raise rates during that meeting remains to be seen. A full schedule of the FOMC’s meetings can be found below, both for 2022 and 2023.

2022 Fed meeting schedule

  • Jan. 25–26, 2022: Fed maintains target range of 0%-0.25%
  • March 15–16, 2022: Fed rate hike to target range of 0.25%-0.5%
  • May 3–4, 2022: Fed rate hike to target range of 0.75%-1%
  • June 14–15, 2022: Fed rate hike to target range of 1.5%-1.75%
  • July 26–27, 2022: Fed rate hike to target range of 2.25%-2.5%
  • Sept. 20–21, 2022: Fed rate hike to target range of 3%-3.25%
  • Nov. 1–2, 2022: Fed rate hike to target range of 3.75%-4%
  • Dec. 13–14, 2022: Fed rate hike to target range of 4.25%-4.5%

2023 Fed meeting schedule

  • Jan. 31–Feb. 1, 2023: Fed rate hike to target range of 4.5%-4.75%
  • March 21–22, 2023: Fed rate hike to target range of 4.75%-5%
  • May 2–3, 2023: Fed rate hike to target range of 5-5.25%
  • June 13–14, 2023: Fed maintains target range of 5-5.25%
  • July 25–26, 2023: Fed rate hike to target range of 5.25-5.5%
  • Sept. 19–20, 2023: Fed maintains target range of 5.25-5.5%
  • Oct. 31–Nov. 1, 2023: Fed maintains target range of 5.25-5.5%
  • Dec. 12–13, 2023: Fed maintains target range of 5.25-5.5%

Estimate the effects of inflation

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