Other U.S. interest rate determination methods
Credit cards and savings accounts are most vulnerable to fluctuations in the federal funds rate, followed by personal loans, auto loans, and mortgages. Interest rates on all of these products depend on other important factors, such as your credit score.
Because Federal Reserve rates are short-term interest rates, fluctuations in them have a strong impact on short-term lending products and tend to have a greater impact on floating rate products than on fixed rate products.
Here we explain how banks set interest rates on credit cards, loans, and savings accounts, and how changes in the federal funds rate affect you.
Credit Card Interest Rates
Because most credit cards have variable interest rates, changes in the Fed's benchmark directly affect credit card annual percentage rates (APRs), which are tied directly to the prime rate (the interest rate for customers with good credit) and are fixed at a maximum of 3 percentage points above the federal funds rate.
Additionally, because credit cards are the most short-term form of borrowing, interest rates change almost immediately in response to changes in the federal funds rate. However, because credit card interest rates are relatively high, these changes (for example, an APR going from 17.25% to 17.50%) go largely unnoticed.
Recent interest rate increases have pushed credit card interest rates to all-time highs.
The average interest rate on a credit card is 22.93% for new applicants and 21.59% for existing accounts. In March 2022, before the Fed started raising rates, the average credit card APR was 16.17%.
Personal loan interest rates
Personal loan interest rates are not directly tied to the prime rate or the federal funds rate, but they may be affected. Changes in the federal funds rate may eventually lead to changes in personal loan interest rates, but those rate changes may not happen as immediately as with credit cards.
Additionally, many personal loans are fixed-rate, which means that if you already have a personal loan, your interest rate will remain the same for the life of the loan, no matter how the federal funds rate changes. Variable-rate loans can fluctuate with changes in the federal funds rate.
The average interest rate on a 24-month personal loan increased from 9.38% in 2021 to 12.49% in February 2024, according to the most recent figures available from the Federal Reserve.
Car Loan Interest Rates
Like personal loans, auto loan interest rates aren't directly tied to the federal funds rate, but because they're usually shorter term — between two and five years — they can be affected by the federal funds rate.
However, changes in auto loan rates are likely to be minimal, since they are based primarily on other factors like credit scores and the bond market.
The recent interest rate hike won't affect your current auto loan, but it could increase costs on new auto loans or loans with adjustable rate rates.
As of February 2024, the average interest rate for a 72-month car loan was 8.41%.
Mortgage interest rates
Mortgages are generally long-term loans, so fluctuations in short-term interest rates are less likely to affect them. Mortgage rates are not directly tied to the federal funds rate, but are set based on a variety of economic indicators. This includes the federal funds rate, but also factors such as unemployment, inflation, and the bond market.
While people with existing mortgages won't be affected by the recent interest rate increases, those with adjustable rate mortgages (ARMs) could see their costs rise.
The average interest rate for a 15-year mortgage is 6.29%.
Regular deposit interest rate
Interest rates on savings accounts are fairly sensitive to changes in the federal funds rate. If interest rates are cut, banks may cut the APY offered on savings accounts pretty quickly to protect their profits.
While increases in the federal funds rate don't typically translate into dramatic and immediate increases in savings account interest rates, a rising interest rate environment is still favorable for savers.
Currently, the average APY on a savings account is 0.45%. The average money market rate is 0.68%. CD rates have also increased since the Fed hiked rates. The average rate for a 12-month CD is currently 1.80%.
The Federal Reserve's interest rates are an important tool for guiding the economy: raising the federal funds rate can protect a strong economy, while lowering the federal funds rate helps cushion the downturn in a weakening economy.
These changes will affect your wallet — lower interest rates favor borrowers, while higher interest rates favor savers — but ultimately, your own money habits will be the primary factor that determines your financial future.