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What Fed rate changes could mean for loans, mortgages and savings

The Federal Reserve is expected to keep its key interest rate steady on Wednesday, but U.S. households will be watching for clues as to whether rate cuts are on the horizon, which could have significant implications for their monthly budgets and influence major purchasing decisions.

The central bank raised its key rate to a range of 5.25 to 5.50 percent, the highest level in more than two decades, as part of a series of hikes over the past two years. The goal was to control inflationwhich has cooled significantly from the 2022 peak of 9.1%.

Fed officials have kept rates unchanged since July while continuing to monitor the economy. And with inflation still somewhat stubborn — price increases Interest rates have been hovering around 3.2% for five months now – policymakers are unlikely to move towards rate cuts too quickly.

Yet several banks have already begun to anticipate possible reductions by reducing the rates they pay to consumers, including on some certificates of deposit.

Here's how different rates are affected by the Fed's decisions – and where they stand.

Credit card rates are closely tied to central bank actions, meaning consumers with revolving debt have seen these rates rise rapidly over the past two years. Increases usually happen within one or two billing cycles, but don't expect them to decrease that quickly.

“The urgency of paying off expensive credit cards or other debt is not diminished,” said Greg McBride, chief financial analyst at Bankrate.com. “Interest rates took the elevator up, but they’re going to take the stairs down.”

This means consumers should prioritize paying off the most expensive debts and take advantage of zero percent, low-rate balance transfer offers when they can.

The average credit card rate with assessed interest was 22.75% at the end of 2023, according to the Federal Reserve, compared to 20.40% in 2022 and 16.17% at the end of March 2022, when the Fed began its series of rate hikes. rate.

Auto loan rates remain high, which, coupled with rising car prices, continues to reduce affordability. But that hasn't deterred buyers, many of whom returned to the market after putting off purchases for several years due to limited supplies during the Covid-19 pandemic and then Russia's invasion of Ukraine.

The market is expected to normalize this year: inventories of new vehicles are expected to increase, which could help ease prices and lead to better deals.

“The Fed's indications that it has met its rate-hike targets could be a sign that rates could be lowered at some point in 2024,” said Joseph Yoon, a consumer analyst at Edmunds, a consumer research firm. automotive research. “Improved inventory for manufacturers means buyers will have more choice and dealers will have to earn their customers' business, potentially with greater discounts and incentives. »

The average loan rate for new cars was 7.1 percent in February, according to Edmundsup slightly from 7% the previous month and February 2023. Used car rates were even higher: the average loan had a rate of 11.9% in February 2024, compared to 11.3% the same month of 2023.

Auto loans tend to track the yield on five-year Treasury bonds, which is influenced by the Fed's key rate — but that's not the only factor that determines how much you'll pay. A borrower's credit history, vehicle type, loan term and down payment are all taken into account when calculating the rate.

Mortgage rates have been volatile in 2023, with the average 30-year fixed-rate loan climbing as high as 7.79% in late October before dropping about a point and stabilizing: the average 30-year mortgage rate was 6.74% as of March 14. according to Freddie Mac, compared to 6.6 percent the same week last year.

“Mortgage rates remain elevated as the market faces pressure from persistent inflation,” Sam Khater, Freddie Mac’s chief economist, said in a statement last week. “In this environment, it is highly likely that rates will remain elevated for a longer period of time.”

Rates on 30-year fixed-rate mortgages do not move in tandem with the Fed's benchmark, but generally follow the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations in terms of inflation, the Fed's forecasts. stocks and how investors react.

Other real estate loans are more closely linked to central bank decisions. Home equity lines of credit and adjustable rate mortgages – which each feature variable interest rates – typically increase within two billing cycles after a Fed rate change. The average home equity loan rate was 8.66 percent as of March 13. according to Bankrate.comwhile the average home equity line of credit was 8.98 percent.

Borrowers who hold federal student loans are not affected by the Fed's actions because these debts carry a fixed rate set by the government.

But batches of new federal student loans are priced each July based on the 10-year Treasury auction in May. And those loan rates have climbed: Borrowers with federal undergraduate loans disbursed after July 1, 2023 (and before July 1, 2024) will pay 5.5%, compared to 4.99% for loans disbursed during the same period a year ago. Just three years agorates were less than 3 percent.

Graduate students taking out federal loans will also pay about half a point more than the rate a year earlier, at about 7.05 percent on average, as will parents, at 8.05 percent on average .

Private student loan borrowers have already seen their rates rise due to previous increases: Fixed and variable rate loans are tied to benchmarks that track the federal funds rate.

Even though the Fed's benchmark rate remained unchanged, several online banks have begun cutting the rates they pay consumers.

Indeed, now that rates have likely peaked and could eventually fall, several online banks have already lowered rates several times this year on certificates of deposit, which tend to follow those on similarly dated Treasury securities . Online banks including Ally, Discover, and Synchrony, for example, have all recently cut their 12-month CD rates to less than 5%. Marcus now pays 5.05 per cent, up from 5.50 per cent, while Barclays has cut its rate from 5.3 per cent to 5 per cent.

“CD rates are already falling, and as we get closer to the first rate cut, they will only fall further,” said Ken Tumin, founder of DepositAccounts.com, part of LendingTree.

The average one-year CD at online banks was 5.02 percent as of March 1, down from its peak yield of 5.35 percent in January, but up from 4.56 percent a year earlier, according to DepositAccounts.com.

The average yield on an online savings account was 4.44 percent as of March 1, down slightly from a high of 4.49 percent in January, according to DepositAccounts.com, and up from from 3.52 percent a year ago. But the returns on money market funds offered by brokerage firms are even more attractive because they have tracked the federal funds rate more closely. The yield on the Crane 100 Money Fund Indexwhich tracks the largest money market funds, was 5.14 percent on March 19.

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