By Sabrina Karl
Interest rates are a generally understood financial concept. If you’re borrowing, interest is your cost to access the money you want, and if you’re saving, it’s your reward for letting someone else hold your money.
But what about the Fed’s famous interest rate, which garners major news headlines at least every 7-8 weeks? Do the Fed’s rate moves have the same simple effect on American households who are borrowing or saving?
While the Federal funds rate does play a sort of anchoring role to much of the market’s broader interest rates, the effect is stronger for some financial instruments and weaker — or non-existent — for others. Let’s break them down.
First off, mortgages. For most homeowners, Fed changes won’t affect your mortgage rate or payments since most of us hold fixed-rate mortgages where the rate is locked for up to 30 years. But the Fed rate does impact adjustable rate mortgages, or ARMs. If the Fed rate has dropped since your last adjustment, you could see your monthly payment decrease.
What about shopping for a new or refinanced mortgage? The rate impact here is minimal, as mortgage rates are linked to 10-Year Treasury yields rather than the Fed’s rate.
Meanwhile, the effect on auto loans is moderate. The Fed doesn’t directly affect these rates, but it does influence the prime rate on which many auto loans are based. So auto loan rates do trend down with a lower Fed rate.
Where consumers most directly see a Fed impact is in reduced credit card rates, but also lower interest rates on bank deposits such as savings, money market, and CD accounts. Indeed, deposit rates have sunk dramatically since the Fed’s double emergency rate cuts in March, and aren’t expected to meaningfully rise until the Fed raises rates again.