It’s Fed Week. So, What the Heck Is Happening With Interest Rates?
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If you’ve been listening to the news, you’ve probably heard someone talk about interest rates being off the charts. Interest is the amount you’re charged as a borrower to take out a loan or use credit. Interest could also be the amount a financial institution pays you, i.e., what you earn for investing your money.
What determines interest rates? Why are personal finance writers (guilty as charged) constantly telling you it’s a good time to save money and a bad time to borrow money?
Behold the Federal Reserve, aka the Fed, the central bank of the US. Its policy-making body meets this week on June 11-12 to discuss a possible adjustment to the federal funds rate, the mother of all interest rates.
You might be saying, “Why should I care about a bunch of people in suits talking about the economy?” Just consider the way interest rates personally affect your credit card debt and whether or not you can afford a mortgage on a house. Interest rates even affect how much annual percentage yield you earn from your savings account.
Trust me, I didn’t know how much influence the Fed had on my finances until I started my career as a personal finance reporter three years ago. Here’s what you need to know about interest rates ahead of the Fed’s meeting on Tuesday and Wednesday.
What the Federal Reserve could decide this week
We’ve introduced you to the Fed. Now, what the heck does the Fed do?
The Fed meets eight times a year to assess the economy’s health and set monetary policy, primarily through adjustments to the federal funds rate, the interest rate used by US banks to lend or borrow money to each other overnight.
Imagine a situation where the financial institutions and banks make up the orchestra, and the Fed is the conductor, directing the markets and controlling the money supply.
Though the Fed doesn’t set the rates for our credit cards and mortgages, its policies have a ripple effect on the everyday consumer. If the central bank “maestro” decides to increase the federal funds rate, many banks tend to increase short-term interest rates. When the Fed lowers rates, banks tend to drop short-term rates, too.
Now, the surprising thing about recent Fed meetings is that there usually aren’t major surprises.
Financial experts and market watchers spend a lot of time predicting whether the Fed will hike or cut interest rates based on the direction of the economy, with a special focus on inflation. When inflation is high and the economy is in overdrive, the Fed tries to pump the brakes by discouraging borrowing through higher interest rates and decreasing the money supply. Since March 2022, the Fed raised the federal funds rate 11 times, which helped cool inflation.
But inflation isn’t completely in check yet, and experts anticipate the central bank will likely decide to keep the federal funds rate steady this week at a target range of 5.25% to 5.5%.
In plain English: Interest rates are still high, but they’re not going up, at least this month.
Given that there’s little chance rates will change, it’s worth keeping an eye on what the Fed has to say at the closing of the meeting on Wednesday, which could reveal if and when officials might forecast rate cuts later this year.
How the Federal Reserve affects your money
What does this week’s Fed decision mean for credit card APRs, mortgage rates and savings rates right now?
Credit cards
Raising or lowering the federal funds rate can cause credit card issuers to increase or decrease the price of credit for cardholders. You won’t feel the effects right away, and every issuer has different rules about changing annual percentage rates. However, if the Fed changes rates at its policy meeting, you might notice your APR adjust within one to two billing cycles.
Key takeaway from CNET Money expert Tiffany Connors: “If you have credit card debt, the Fed’s vote on interest rates probably won’t affect you much in the short term. Credit card APRs will likely remain high through at least the end of the year, making credit card debt very expensive. Prioritize paying off credit card balances and avoid taking on additional debt if you can.”
Mortgage rates
The Fed’s decisions impact overall borrowing costs and financial conditions, which influence the housing market and home loan rates. For example, when the Fed carried out a series of rate hikes starting in March 2022, mortgage rates moved up in tandem, reaching a peak last fall.
Key takeaway from CNET Money expert Katherine Watt: “Until the Fed makes a move on rate cuts, mortgage rates are likely to remain about where they are now. However, any new economic data that shifts market expectations for future Fed rate cuts could push mortgage rates up or down in the short-term.”
Savings rates
Savings rates are variable and move in lockstep with the federal funds rate, so your APY will likely go down once the Fed drops rates. If the Fed raises rates, many banks tend to increase their APYs for traditional and high-yield savings accounts, giving accountholders bigger returns on their deposits over time. Since not all banks are created equal, we regularly track the best high-yield savings accounts and certificates of deposits at CNET.
Key takeaway from CNET Money expert Kelly Ernst: “If the Fed pauses interest rates again this week, APYs on CDs and savings accounts are likely to stay elevated. That makes now a great time to open either type of account and maximize your earnings before the Fed does begin cutting rates.”
What’s next
Remember that experts often have varying opinions about monetary policy, and all we can do is make a rough speculation on when interest rates will drop and by how much.
Keep following CNET for Fed Day coverage. The decisions you make with your money are personal, but we’re here to help guide you.
