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If you’ve been listening to the news, you’ve probably heard someone talk about interest rates off the charts. Interest is the amount you are charged as a borrower to borrow or use credit. Interest can also be the amount paid to you by a financial institution, i.e. what you earn for investing your money.
What determines interest rates? Why personal finance authors (guilty as charged) keep telling you this is a good time to save money and bad time to borrow money?
Look at the Federal Reserve, also known as the Fed, the central bank of the United States. 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 thinking, “Why should I care about a bunch of people in suits talking about the economy?” Just think about how interest rates affect you personally credit card debt and whether or not you can afford a mortgage on a house. Interest even affects how much annual percentage rate of return you earn from yours saving account.
Trust me, I had no idea how much influence the Federal Reserve 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 meeting on Tuesday and Wednesday.
What the Federal Reserve might decide this week
We introduced you to the Federal Reserve. Now, what the hell is the Fed doing?
The Federal Reserve meets eight times a year to assess the state of the economy and set monetary policy, primarily through adjustments to the federal funds rate, the interest rate used by U.S. banks to lend or lend money to each other for a night.
Imagine a situation where financial institutions and banks make up the orchestra, and the Fed is the conductor who directs the markets and controls the money supply.
Although the Fed does not set interest rates for ours credit cards and mortgages, its policies have a ripple effect on the everyday consumer. If the central bank maestro decides to raise the federal funds rate, many banks tend to raise short-term interest rates. When the Fed cuts ratesbanks also tend to reduce short-term interest rates.
Now, the surprising thing about recent Fed meetings is that there are usually no big surprises.
Financial experts and market watchers spend a lot of time predicting whether the Fed will raise or lower interest rates based on the direction of the economy, with a particular focus on inflation. When inflation is high and the economy is in an accelerated mode, the Federal Reserve tries to pump the brakes by discouraging borrowing through higher interest rates and reducing the money supply. Since March 2022, the Fed has raised the federal funds rate 11 times, helping to cool inflation.
But inflation is not yet fully under controland experts expect the central bank is likely to 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 won’t be going up, at least not this month.
Given that there’s little chance that rates will change, it’s worth keeping an eye on what the Fed has to say when the meeting closes on Wednesday, which could reveal if and when officials may forecast rate cuts later this year .
How the Federal Reserve Affects Your Money
What the Fed’s decision this week means for APR on credit cardsmortgage rates and savings rates right now?
Credit cards
A rise or fall in the federal funds rate can cause credit card issuers to raise or lower the cost of credit for cardholders. You won’t feel the effect right away, and each issuer has different rules for changing APRs. However, if the Fed changes interest rates at its policy meeting, you may notice an APR adjustment within one to two billing cycles.
Key takeaways from a CNET Money expert Tiffany Connors: “If you have credit card debt, the Fed’s rate vote probably won’t affect you much in the short term. Credit card APRs are likely to remain high at least through 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 affect the overall cost of borrowing and the financial conditions that affect the housing market and interest on housing loans. For example, when the Fed made a series of rate hikes beginning in March 2022, mortgage rates rose at the same time, peaking last fall.
Key takeaways from a CNET Money expert Catherine Watt: “Until the Federal Reserve takes action to lower interest rates, mortgage rates are likely to remain where they are now. However, any new economic data that changes 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 step with the federal funds rate, so your APY will likely decrease after the Fed cuts rates. If the Fed raises interest rates, many banks tend to increase their APYs for traditional and high-yield savings accounts, giving account holders a greater return on their deposits over time. As not all banks are created equal, we regularly follow up the best high yield savings accounts and certificates of deposits on CNET.
Key takeaways from a CNET Money expert Kelly Ernst: “If the Fed cuts interest rates again this week, APYs on CDs and savings accounts are likely to remain high. That makes now a great time to open both types of accounts and maximize your earnings before the Fed starts cutting rates.
What next
Remember that experts often have different opinions about monetary policy, and all we can do is make rough guesses as to when interest rates will fall and by how much.
Stay tuned to CNET for Fed Day coverage. The decisions you make with your money are personal, but we’re here to help guide you.
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