The Fed just raised rates. Here’s what it means for borrowers and savers

By Jeanne Sahadi, CNN

(CNN) — For the first time in more than three years, members of the Federal Open Market Committee unanimously decided to hike the Fed’s key overnight bank lending rate by a quarter point in a bid to reduce inflation, which remains well above the central bank’s 2% target.

And 16 of the 18 FOMC officials forecast another rate hike later this year.

The effect of the Fed’s decision on your savings and debts – which also may be affected by higher yields on the 10-year and other Treasuries – will vary.

If you’re already in a fixed-rate bank savings product like a certificate of deposit, or a fixed-rate loan such as a home equity or auto loan, you won’t see any changes. Those rates are locked in. (Ditto if you own individual Treasury bonds and do not plan to sell them before maturity.)

But if you plan to put money into a new savings vehicle or take out a new loan in the coming months, you will soon start seeing changes in the rates on offer. The same is true for any money you currently have that is tied to variable-rate products like a high-yield savings account or credit card.

The speed at which those bank rates will change, however, won’t be uniform. Generally speaking, the biggest banks may move fastest to raise the rates they charge borrowers and slowest to raise the rates they pay savers.

Smaller community banks and online banks, however, may be quicker to respond to a hike in the Fed funds rate to the benefit of savers. That’s especially the case if they’re seeking to attract more in deposits so they can make more loans, said Patrick Ryan, president and CEO of First Bank.

Here’s a breakdown of how the Fed’s latest decision may affect different types of savings and debts and where you might find the best rates going forward.

Your savings

Seeking better yields for your savings or just wondering if you’re already in the best position to get them? Consider:

Online high-yield savings accounts: Regular savings accounts pay the equivalent of bunk – as in less than 1% and in many cases less than 0.05%. Your best yields for quick-access emergency savings and money you’ve set aside for upcoming anticipated expenses will be found in online high-yield savings accounts at FDIC-insured banks.

They have variable rates that should go up within the next month following the Fed hike, said Ken Tumin, cofounder of DepositQuest.com.

The average rate on offer from the five largest online banks (e.g., Ally and Marcus) was 3.14% on Monday, according to Tumin’s site. It also listed a handful of banks offering variable annual percentage yields ranging between 4.1% and 4.34%.

Certificates of deposit: These fixed-rate products offered by FDIC-insured banks are sold by the banks themselves – or, for a wider menu of options from banks everywhere you can buy a so-called brokered CD online. On Wednesday morning, CDs of varying durations up to 10 years had average annual percentage yields ranging between 4.1% and 5% on Schwab.com.

For example, the average APY for a 6-month CD was 4.14% and 4.9% for a 5-year CD.

While CD rates are tied to Fed moves, when a bank is seeking deposits or is competing with higher bond yields that may attract savers, it may raise its CD rates by more than a Fed rate hike, Ryan said, noting the average CD holder is “a more rate-sensitive customer.”

US Treasury bonds: The range in average yields-to-maturity for Treasury bills and notes of varying durations up to 10 years was roughly similar to that of CDs – between 4.1% and 4.99% on Schwab.com on Wednesday.

US Treasury bonds offer fixed, inflation-beating returns for almost no risk, since they are backed by the full faith and credit of the United States. They’re helpful when you want to park money that you won’t need immediately or to build an income-producing portfolio, since they pay out predictable interest income every year.

And they are more tax friendly than CDs, since Treasury bond interest is exempt from state and local income taxes. “If you’re in a high-tax state, Treasuries have an advantage over CDs,” Tumin said.

You will get the same tax advantage if you buy Treasury Inflation-Protected Securities (TIPS) or I bonds.

Separately, AAA-rated municipal bonds, which are issued by state and local governments, were offering average yields to maturity between 2.85% for six-month paper and 4.99% for 10-year durations on Wednesday. Muni income is typically exempt from federal income tax and also may be exempt from state and local income taxes if you buy one issued by your home state or city.

Money market funds: Money market mutual funds, which typically invest in short-term government debt, short-term top-grade corporate debt and CDs, are likely to respond within a week or two to a rise or fall in bond yields, Tumin said.

The average 7-day yield on the top 100 money market funds was 3.51% as of Tuesday, according to Crane Data. Two of the biggest money market funds – Vanguard Federal Money Market Fund and Fidelity Treasury Money Market Fund had 7-day yields of 3.63% and 3.36% respectively.

Your debts

A higher Fed rate coupled with higher bond yields means higher debt burdens for borrowers.

Credit cards: The average credit card rate is currently 19.56%, more than a percentage point below its all-time high hit in August of 2024, according to data from Bankrate. But consider that a distinction without a difference. The average credit card rate is punitively high if you carry a balance from month to month.

You can expect to see banks raise their credit card rates within a month or two, Tumin said.

If you can’t pay off in full what you owe now or anytime soon, see if you qualify for a balance transfer card that will give up to 21 months interest-free to pay down your balance. If that doesn’t work, see if a bank is willing to give you a personal loan at a fixed rate far below what you’re currently paying and use the money to pay off your credit cards.

Mortgages: The average 30-year fixed mortgage rate was 6.76% last week, according to Freddie Mac, up from 6.3% a year ago and above the 5.9% it hit briefly in February.

Mortgage rates are most closely tied to movement in the 10-year Treasury yield, which crossed 5% this week, hitting its highest level since 2007. It typically moves in anticipation of the Fed’s next move and on economic data, including inflation.

The Fed’s rate hike this week may help calm the bond market, preventing the 10-year yield from rising further and maybe even falling. What would that mean for mortgage rates?

“In 2025, when the Fed was cutting rates, mortgage rates went up. So, who’s to say that in 2026, if the Fed raises rates, mortgage rates can’t come down?” said Melissa Cohn, a regional vice president of William Raveis Mortgage. (Here’s what other mortgage experts think.)

Auto loans: Like mortgages, auto loan rates are driven (no pun intended) by Treasury yields more than the Fed rate. But those yields often are responsive to anticipation of Fed moves.

And, like Treasury yields and car prices, the cost of financing a car purchase has remained elevated this year. In August, the average transaction price for a new car was $49,121, up from $48,658 in January, according to data from Edmunds.com. The average amount financed was $44,658 at a 7% rate. That’s up from an average loan size of $43,597 at 6.8% in January. The average loan term was 70.4 months in August, up from 70 months at the start of the year.

The upward trend is similar for used car loans, for which the average monthly payment in August was $582, up from $558 in January.

Whether auto loan rates rise or fall in the wake of Wednesday’s Fed decision, a quarter-point change might only add or subtract a few dollars on the monthly payment for a $40,000 loan, according to Joseph Yoon, consumer insights analyst at Edmunds.

But you can take steps to get the best rate available if you make sure your credit score is strong and look for a good deal.

“What car shoppers should keep their eye on is manufacturer incentive financing, where automakers have the ability to use low promotional rates to clear inventory regardless of broader economic impacts like rate hikes,” Yoon said.

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