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What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Yahoo Personal Finance· Getty Images
Hal Bundrick
Updated 7 min read

The Fed is still waiting for a sign. Interest rate cuts may be on the horizon, but for now, no one is sure just how far down the road they are.

After inflation peaked at 9.1% in June 2022, the Federal Reserve worked to tame consumer prices with a series of 11 interest rate hikes over the ensuing months. Now, with inflation clocking in at 3.2% in February, the Fed is still in a wait-and-see mode.

With a target of 2%, the Fed's decision on March 20, 2024, to hold rates where they are for the fifth meeting in a row shows the central bank believes it's winning the fight against inflation — but is in no rush to cut rates too soon.

The Fed controls one interest rate: the federal funds rate, which is the short-term rate banks use to borrow from each other. The latest action keeps the target range for the federal funds rate at 5.25-5.50%. Fed interest rate decisions filter through the financial world, impacting virtually every facet of borrowing costs and saving rates.

Interest rate management is monetary medicine the Fed uses to:

  • Slow the economy by raising interest rates in an effort to tame rising costs (high inflation) as measured by the consumer price index.

  • Help mount a recovery when we're at the opposite end of an economic cycle by lowering interest rates as an injection of liquidity into the financial system.

  • Allow past moves to take root while the Fed considers future actions by holding rates steady.

In a statement on March 20, the Federal Open Market Committee maintained the same language from its December release, saying it "does not expect it will be appropriate to reduce the target [interest rate] range until it has gained greater confidence that inflation is moving sustainably toward 2%."

The FOMC still predicts three interest rate cuts before the end of 2024.

Here’s how the Fed’s current interest rate stance could trickle down to your loans and accounts.

Your short-term liquidity depends on money in the bank. For years, that has meant Americans treading water as cash earned next to nothing. As interest rates have risen, so have deposit account rates. The continuing pause in interest rate increases by the Federal Reserve will likely keep deposit account rates near their current level.

But savvy savers need to shop for the best returns as providers consider easing their interest rate payouts.

Checking accounts that pay interest offer the most meager returns. But you need quick access to the money, and if you manage your cash flow, the bank won't have most of that money in its hands for long.

Interest-earning checking accounts paid a national average of 0.06% monthly in March 2023. A year later, that rate had edged up to 0.07%. On a scale of "not much interest" measured in basis points, that's close to a rounding error.

Let's move up the interest-paid-for-cash scale.

Short to mid-term money is best parked in a savings account. It's part of your easy-in, easy-out cash strategy. Last year, in March, the monthly average interest rate on a traditional savings account at a brick-and-mortar bank was 0.37%. In March 2024 it is 0.47%.

High-yield savings accounts pay more — Yahoo Finance is seeing high-yield savings account APYs of 4.5% to 5% or slightly more. (APY is the result of compounding your interest rate. Compounding periods can vary by bank.)

A money market account often boosts your return from a common checking account, but you'll likely need to deposit anywhere from $10,000 to $100,000 to earn the raise.

Last March, the national average monthly interest rate was 0.54%. One year later, it is 0.67%. Consider putting your second layer of cash in an above-average money market account. It's the money you want close at hand, but not checking-account close.

To do that, look for a high-yield money market account. As the Federal Reserve holds interest rates where they are, high-yield money market accounts will remain elevated. Again, Yahoo Finance is seeing high-yield interest rates in the mid-4% range and higher.

What to do now: Shop rates at banks, both brick-and-mortar and online. Keep your near-term cash nimble and earning the best rate it can.

This higher interest rate cycle has been good news for CDs. As the Fed pushed rates up, certificates of deposit earned more.

A 12-month CD was earning 1.49% monthly interest in March 2023. A year later, the same term CD is paying 1.81%. The best CDs are around 5% APY. These rates are already creeping lower from January's Fed rate freeze. Your minimum deposit and term will determine your rate.

Consider a CD ladder to surf the rising wave of interest rates.

What to do now: Use CDs to earn interest on your mid-term money. Staggering maturities, with the ladder strategy mentioned above, will allow you the flexibility to benefit from higher interest rates and access your money without locking it all up for years.

Now to the other side of the asset/liability ledger. Higher interest rates influenced by the Federal Reserve's tightening of the money supply mean you pay lenders more to borrow.

Interest rates on personal loans have risen from 8.73% at the beginning of the Fed rate hikes in 2022 to 12.35% in November 2023, according to the latest data available.

With forbearance ending and payments due again, student loans are rising top-of-mind again for those who still owe. Most federal loans have fixed interest rates, so Fed policy doesn't impact them. Private student loans may have a variable rate, and Fed rate hikes can be a factor.

To learn the interest rate on an existing loan, contact your lender or loan servicer.

The latest plan from the Biden administration, SAVE IDR, could allow lower payments to those who qualify. Over 800,000 borrowers have been notified of loan forgiveness related to income-driven repayment plans.

Meanwhile, interest rates on new student loans are rising.

If you've been looking to buy a home in the past two years, you know this story. Home loan rates have soared. When the Fed hikes began, lenders were pricing 30-year fixed-rate mortgages around 4%, according to Freddie Mac. Home loan interest rates for 30-year fixed mortgages still linger just below 7%.

The Fed doesn't directly influence current mortgage rates, they're a function of lenders tracking financial markets. However, if high inflation continues to ease, it's likely that home loan rates will soon follow. It won't be a diamond run descent. It took nearly 20 years for mortgage loan rates to fall from 7% in 2001 to an annual percentage rate under 3% in 2020. And homebuyers may not see lenders price home loan rates that low again anytime soon. The 50-year average for a 30-year fixed-rate mortgage is still well over 7%.

What to do now: Carefully consider taking on any additional debt as interest rates remain elevated. If you do initiate a new loan, budget your monthly payment for rates to remain mostly stable. Then if interest rates do head lower and you get a refinancing opportunity, it will be a welcome budget surprise.

While the Fed's fight against inflation may be easing the rise in consumer prices, the central bank's past rate increases have impacted your credit card debt, too – and not in a good way.

Credit card interest rates have moved from an average of just over 16% to well over 21% during the Federal Reserve's latest rate-raising cycle. No doubt, those variable APR interest rate charges on credit cards will remain high as long as the monetary policy holds firm.

That means minimum payments due won't ease and stiff interest charges on credit card balances will remain unless you pay off your cards each billing cycle.

What to do now: Prioritize paying off the credit cards you can — especially those with the highest interest charges — and consider balance transfers to lower interest rate and zero-interest credit card offers as your credit score allows. With good credit, a personal loan for credit card debt consolidation may be another option to consider.