Federal Reserve hikes interest rates - What it means for your wallet and the economy

WASHINGTON - The Federal Reserve has increased the cost of borrowing, creating challenges for borrowers while offering potential benefits to savers.

On Wednesday, the central bank raised its benchmark interest rate by a quarter-point, marking its first increase since summer 2023. The move is expected to make loans for homes, vehicles and other major purchases more expensive, while people with savings could see slightly higher returns.

The rate hike brings the Fed’s target range to 3.75% to 4.00%.

What they're saying:

Kevin Warsh, Fed chair since May, has assured Congress that central bank policymakers "have no tolerance for persistently elevated inflation."

Speaking to reporters Wednesday after the Fed's meeting, Warsh argued that the rate hike will benefit lower-income Americans because they are hurt most by higher prices. "The least well off are the ones that have the most to gain from stable prices,'' he said. "The decision we made today was the right decision to deliver on the remit that Congress gave us to ensure stable prices."

Big picture view:

Inflation is a worldwide problem, and the European Central Bank hiked rates across the Atlantic last week to help diminish it.

A report on Wednesday morning showing that shoppers spent much more at U.S. retailers last month than economists expected could help embolden the Fed. It could be a signal that the economy remains strong enough to withstand higher rates, though the growth could also simply show that shoppers are having to spend more because of higher prices.

Surging investment in AI data centers has also been accelerating inflation and contributing to higher longer-term interest rates, though now leading companies are discussing slowing the technology’s development.

Why you should care:

The Fed’s potential rate hike comes just seven weeks before the midterm elections in which high prices and affordability have taken key roles. Trump has demanded that the Fed cut rates, a move that isn’t on the table, and on Sunday the president said, "the United States is so strong we should be paying the lowest interest rate in the world."

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The rate increase will likely make it even costlier to borrow for homes, autos and other purchases. But if you have money to save, you’ll probably earn a bit more interest on it.

What’s driving the rate increases?

The Federal Reserve is raising interest rates to cool consumer spending. The goal is to reduce demand for homes, cars and other goods and services, slowing the economy and easing pressure on prices.

Which consumers will feel the biggest impact?

Anyone borrowing money for a major purchase — including a home, car or large appliance — will likely pay more. Consumers carrying credit card balances will also see their monthly payments and interest costs rise.

How will credit card rates change?

Credit card interest rates had already reached their highest level since 1996 before the Fed’s latest move, according to Bankrate.com. They are likely to continue rising.

Americans also appear to be relying more heavily on credit cards to maintain their spending. Total credit card balances have surpassed $900 billion, according to the Federal Reserve — a record high, even without adjusting for inflation.

As interest rates have climbed, zero-interest "Buy Now, Pay Later" loans have grown more popular. But longer-term loans of more than four payments offered by these companies are subject to the same higher borrowing costs as credit cards.

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Consumers who do not qualify for low-interest credit cards because of weak credit scores are already seeing higher rates add to their balances.

How are savers affected?

Higher interest rates have pushed returns on high-yield savings accounts and certificates of deposit to levels not seen since 2009. That may give households an incentive to save more, if they can. Bonds and other fixed-income investments may also offer better returns.

Savings accounts, CDs and money market accounts do not always move in lockstep with the Fed’s decisions. Online banks and other institutions offering high-yield accounts can be exceptions because they compete aggressively for deposits. The tradeoff is that some may require relatively large deposits.

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Generally, banks use a higher-rate environment to increase profits by charging borrowers more, without necessarily passing along equally attractive rates to savers.

Will higher rates affect homeownership?

Mortgage rates do not always move in tandem with the Fed’s benchmark rate. Instead, they tend to track the yield on the 10-year Treasury note.

Will it be easier to find a home?

Higher mortgage rates have pushed some would-be buyers out of the market, reducing competition for those who remain. But affordability remains a major challenge, particularly for buyers who must manage higher monthly payments.

What if I want to buy a car?

As shortages of computer chips and other parts ease, automakers are producing more vehicles. Some are also cutting prices or offering limited discounts.

But higher auto-loan rates and lower trade-in values have erased much of the potential savings for buyers.

Fed rate increases are typically passed along to auto borrowers, though manufacturer-subsidized financing can soften the impact somewhat.

How have rate hikes affected cryptocurrency?

Cryptocurrencies such as bitcoin have fallen in value since the Fed began raising interest rates. Many high-priced technology stocks have also declined.

When rates rise, relatively safe investments such as Treasury securities become more attractive because their yields increase. That can make riskier assets, including technology stocks and cryptocurrencies, less appealing.

Bitcoin has also faced challenges unrelated to monetary policy. Three major cryptocurrency companies have failed, most recently the high-profile FTX exchange, undermining investor confidence.

Will higher rates affect student loans?

Borrowers taking out new private student loans should expect to pay more as interest rates rise.