Why US banks are raising their rates

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Average interest rates on savings accounts have tripled in one year.

Key points

• The fed funds rate is the rate at which banks and credit unions borrow from and lend to each other.
• The Federal Reserve has raised interest rates five times this year to deal with high inflation.
• Banks pass on higher borrowing costs to consumers, but also raise rates on savings accounts.

You may have noticed that borrowing money costs more now than in the recent past. You could also be earning more money in your savings account these days. This is because major US banks have been steadily raising their interest rates for the past few months.

the Federal Reserve interest rate, also known as the fed funds rate, is the rate at which banks and credit unions borrow from and lend to each other. It is determined by the Federal Reserve and can be changed at any time. These changes can affect consumers because the Federal Reserve interest rate tends to influence interest rates on credit cards, loans, and savings accounts.

If you’re wondering what this means to you, you’re not alone. Here’s how the fed funds rate has changed recently and how it might affect you.

Five rate hikes this year

The fed funds rate is 3% to 3.25% as of September 1. January 21, 2022. This is the third consecutive rate hike of 0.75%, and the fifth rate hike this year. It’s also one of the biggest increases in decades as the Fed focuses on combating inflation levels that are at 40-year highs.

According to a recent statement from the Federal Reserve, the organization’s goal in raising interest rates is to return inflation to 2%. During the pandemic, inflation reached close to 0%. But that number rose rapidly, hitting 5.4% a year ago and peaking at 9.1% in June 2022. Even with the Fed’s rate hikes, inflation only slowed to 8.3% in August.

How rate changes affect you

In response to the Fed’s rate hikes, banks have also raised interest rates. Credit cards and savings accounts are the most sensitive to changes in the federal funds rate, followed by personal loans and auto loans, and lastly mortgage loans.

Here’s how banks set interest rates on their products and how changes in the fed funds rate can affect you.

Credit card interest rates

Most credit cards have a variable interest rate, so a change in the Federal Reserve benchmark will have a direct impact on a credit card annual percentage rate (APR). This is directly related to the prime rate, which is the interest rate for customers with prime credit, and is set at 3% above the upper limit of the fed funds rate.

Moreover, from Credit cards are a short-term lending method, their rates tend to update almost immediately in response to changes in fed funds rates. At the time of this writing, the average credit card interest rate was 18.44%, according to data from CreditCards.com. And the average APR for subprime credit cards was 27.12%. And with recent interest rate hikes, many credit card interest rates have hit all-time highs.

All of these numbers translate to higher interest rates for consumers. So now is a good time to pay special attention to the variable rate on your existing credit cards and keep an eye on the rates on new cards if you’re in the market for one.

personal loan interest rates

interest rates on personal loans they are not directly tied to the fed funds rate, but may be influenced by it. Also, variable rate loans can fluctuate as the federal funds rate changes. For example, the median interest rate on a 24-month personal loan was 8.73% in May 2022 (latest data available), according to the Federal Reserve.

If you are buy a personal loanBe sure to consider how the interest rate might change over time, as well as the rate you’re getting.

Interest rates on savings accounts

interest rates on keeping accounts they are quite sensitive to changes in the fed funds rate. The current APY for savings accounts is now 0.17%, nearly triple the 0.06% APY from earlier this year, according to FDIC data. Many CD rates have also risen since the Federal Reserve rate hikes.

If you have a savings account, you may have seen your interest rate go up once, or even several times this year, and that’s probably a direct result of the change in the fed funds rate.

As mentioned, banks have raised interest rates on these accounts as the Federal Reserve gradually raised its own benchmark interest rate over the past year. As a result, banks have passed on higher borrowing costs to consumers and have also raised rates on savings accounts. So if you’re on the market for a new banking product, or just keeping an eye on your existing accounts and loans, be sure to keep an eye on the fed funds rate to see how it affects your bottom line.