How Federal Reserve Interest Rates Impact Your Wallet

The Federal Reserve has been front and center in the news over the last few years for one main reason: interest rates. And it’s no wonder why, since the Fed’s interest rates can definitely affect your money in all sorts of ways.

At the end of the day, though, you have way more control over your finances than the Fed. Whether rates are going up or down, you’re still in charge of your money.

So, let’s break down how the Fed’s rates can affect your money—and how to stay ahead of the curve. We’ll look at what the interest rates mean for debt, house payments, investments and savings.

Let’s dive in!

Are Federal Reserve Interest Rates Going Down?

In a word—yup. In September 2024, the Federal Reserve lowered interest rates for the first time in four years.¹ By the end of the year, it plans to cut rates two more times.²

This comes on the heels of rates hitting a 20-year high at the end of 2023 as the Fed tried to fight inflation (more on that later).³

What Do Federal Reserve Interest Rates Impact?

Here’s what the Fed’s rates mean for mortgages, credit cards and everything in between.

Mortgages

When it comes to what federal interest rates mean for new mortgages, you probably don’t need us to tell you that higher interest rates lead to higher monthly payments. This is why potential home buyers get excited when rates start dropping—and why some current homeowners start the process of refinancing to take advantage of the lower rate.

When it comes to existing mortgages, it all depends on what type of mortgage you have. Just like other loans out there, if you took on a fixed-rate mortgage, then you’d be safe. See, a fixed-rate mortgage is just like it sounds—the interest rate is set in stone for as long as you have that mortgage (unless you refinance). No matter what kind of craziness goes on with federal interest rates, your mortgage interest rate isn’t budging. 

On the flip side, if you have an adjustable-rate mortgage (ARM) or a home equity line of credit (HELOC), brace for impact here. Since those mortgage rates aren’t locked in, there’s always the chance they’ll go up—and that’s especially true when Federal Reserve interest rates climb. This is why ARMs are never a good idea.

Credit Cards

Credit card interest rates are always super high, even when the Fed lowers rates. And when the Fed raises rates, credit cards get even worse—anyone carrying a balance from month to month will see an interest rate spike.

Moral of the story? Credit cards are never your friend. No matter what the Fed is doing, it’s time to bite the bullet, ditch credit cards for good, and pay those suckers off. And as the amount you still owe becomes less and less, you’ll also be charged less in interest. If that’s not a great reason to take control of your debt and spending habits, we don’t know what is!

Student Loans

Most student loans have a fixed interest rate—meaning the interest was locked in when you agreed to take out the loan. So if you already have student loans, they’re likely not being impacted one way or the other right now.

But any new student loans taken out from this point on will fall under the current interest rates. And like credit cards, student loans are a bad deal regardless of what the Fed is doing.

That’s just another good reason to stop taking on new debt and save up to pay for your college tuition with cash.

Car Loans

Just like student loans, most auto loans have a fixed rate too. So whatever the interest rate was when you signed on the dotted line for the loan, that’s still the same interest you’ll pay. Federal Reserve interest rates don’t impact loan interest rates from a car you financed four years ago, for example.

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Still, the high interest rates on car loans are always going to make financing your vehicle a terrible idea. (Noticing a theme here?) Bottom line: When you pay cash for a car, you don’t have to worry about interest rates.

Investments

When the Fed raises interest rates, it tends to make people (and businesses) buy less stuff. Plus, investors often take it as a sign the economy isn’t in great shape, so they don’t invest as much and sometimes even cash out some of their investments. This combo can cause stock earnings and prices to drop, and sometimes the stock market takes a dip because of it.

But here’s the positive side of that story—a stock market dip is a great time for long-term investors like you to invest while prices are low. When the market springs back and rates go down, you’ll make a return on your investment!

Savings Accounts

Federal Reserve interest rates going up is actually a plus for your savings. Those rising interest rates will give your savings some extra oomph. You’ll see interest rates bump up your rate of return on things like savings accounts and money market funds. The difference won’t be life-changing, but hey, every penny counts. On the other hand, when the Fed lowers its rate, bank savings account interest rates also go down.

Why Does the Federal Reserve Adjust Interest Rates?

The Federal Reserve raises and lowers interest rates to try to keep the economy running smoothly. The Fed keeps tabs on two big-time things that you often hear about in the news: inflation and unemployment.

Inflation

The Fed likes to keep inflation hovering at around the 2% mark.⁴ But when inflation gets too high, raising interest rates is an option the Fed has up its sleeve. Higher interest rates tend to slow inflation because people usually buy less and save more when interest rates go up.

Unemployment

When the Fed raises interest rates to fight inflation, the economy slows down and could fall into a recession. A recession happens when the economy is in a funk for a few months. This means spending is low, the gross domestic product (the total value of all goods and services produced within a country) is negative, and unemployment is high.

When unemployment gets too high during a recession, the Fed typically lowers interest rates, hoping it’ll nudge businesses to borrow more money and, as a result, hire more.

The Fed has quite the balancing act on its hands. When it raises interest rates to slow inflation, it also slows the economy and can cause high unemployment. And when it lowers rates to get the economy moving, it risks causing high inflation.

What Can I Do About Higher Interest Rates?

Even though interest rates have gone down lately, they’re still a lot higher than they were a few years back. That makes a lot of things much more expensive—particularly buying a house.

If you’re trying to become a homeowner right now, here are some tips for making it more affordable:

• Increase your down payment. A bigger down payment means lower monthly payments and less debt. You should aim to put down at least 20% to avoid paying for private mortgage insurance (PMI), but there’s no rule against putting down way more than that.

• Choose an affordable area to live. If you can’t afford a house in the big city, try expanding your search area by just a few miles. Adding 20 minutes to your daily commute could be the difference between getting a house or not.

• Have some patience. Turns out there’s nothing in the Constitution saying you need to own a home by the time you’re 28, 30 or any other age. Don’t be afraid to save some more money and wait until owning a house makes sense for your financial situation.

No matter what, don’t buy a home until you’re totally debt-free and have an emergency fund of 3–6 months of your expenses. You should also make sure your monthly payment on a 15-year fixed-rate mortgage is no more than 25% of your take-home pay.

Keep those tips in mind, and you’ll be in good shape regardless of what the Fed is up to. You’ve got this!