How the Federal Funds Rate Affects You
The federal funds rate — which is set by the Federal Reserve — influences everything from the cost of borrowing to how much you earn on savings. When the Fed adjusts this rate, it sets off a chain reaction that affects consumer loans, credit card APRs, mortgage rates and more. Here’s everything you need to know about the federal funds rate and how it impacts your wallet.
What Is The Federal Funds Rate
The federal funds rate is the interest rate charged by institutions like banks and credit unions to borrow excess balances held at Federal Reserve Banks from each other overnight. The federal funds rate isn’t an exact number. It’s a target rate range set by the Federal Reserve. Banks and credit unions will then negotiate a specific rate between each other within that target range, known as the effective funds rate.
As of May 29, 2025, the effective funds rate, or the actual rate depository institutions pay each other to borrow reserves overnight, is 4.33%. The federal funds rate target range is 4.25% to 4.50%.
The federal funds rate has a domino effect on almost every form of borrowing. When rates rise, so do borrowing costs. And vice versa. For example, when the Fed raised rates 11 consecutive times from 2022 to 2023 to combat inflation brought on by pandemic-related supply chain issues, the rate on a 30-year fixed-rate mortgage hit its highest of 7.76% in more than two decades, according to Freddie Mac data.
In short, the federal funds rate acts as a benchmark for many other interest rates across the economy and helps steer economic growth.
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How Is The Federal Funds Rate Adjusted?
The Federal Open Market Committee (FOMC) meets eight times a year to set a target range for the federal funds rate. It’s typically adjusted based on how the economy is doing:
- Lowering the rate: When economic growth slows or unemployment rises, the Fed may try to stimulate the economy by cutting rates. Doing so makes borrowing cheaper and will also encourage people to spend and invest more.
- Raising the rate: Raising the rate helps cool things down. If inflation is too high, the Fed will increase rates to make borrowing more expensive and slow down spending, which can help bring prices under control.
- Holding the rate steady: When the economy is relatively balanced, the Fed might leave rates unchanged for a while to maintain stability.
What Rising Federal Funds Rate Means to You
The federal interest rate is the rate at which banks borrow money from each other. But the rise and fall of that interest rate affects consumer interest rates on savings accounts, credit cards, mortgages and other personal loans.
Here’s what to expect when the federal funds rate goes up.
Credit Cards
Your credit will become more expensive. Most credit card companies provide variable rate interest, which means they can (and will) change interest rates on the balances you carry from month to month when the Fed raises interest rates overall.
So if the Fed raises the benchmark rate, you may want to consolidate your debt to a credit card with the lowest interest rate, or find a zero-interest balance transfer offer that, for a limited time, would allow you to pay toward reducing the balance and not increase interest payments.
Mortgages
If you have a fixed-rate mortgage, the interest hike won’t impact your monthly payments. But if your rate is variable, expect your monthly mortgage payment to go up when the federal funds rate rises.
If you want to refinance in response to the change in rates, the available bank rates are also going to rise in response to the Fed’s actions. The prime rate also impacts home equity lines of credit, so you should consider looking to reduce that debt amount as well.
Automobile Loans
A higher federal funds rate means it could cost you more to buy a car on a payment plan. That means your monthly payments and total interest costs could rise.
However, the actual rate you’ll pay still depends on your credit score. If you have a solid credit score, you may still be able to qualify for decent rates. But if your credit score is below average, you may be more likely to feel the impact of rate hikes.
As of March, the average interest rate on a 60-month (or five-year) auto loan is about 8.04%, according to the Federal Reserve’s latest data. If the federal funds rate rises, expect that number to go up.
Student Loans
Most federal student loans come with fixed interest rates, so if you already have one, your rate won’t change, even if the Fed keeps raising rates. However, if you’re planning to take out new loans in the future, those could come with higher interest rates than in years past.
Private student loans, on the other hand, can have variable rates that go up when the federal funds rate rises. If you already have a private loan with a variable rate, your monthly payments could increase.
Interest on Savings Will Increase
When the Fed raises borrowing rates, banks usually raise the interest they offer on savings accounts, too. That makes it a much better time to be saving money rather than taking on new debt.
If you have a savings account, especially a high-yield savings account, you’ll most likely see your interest rate climb with the federal funds rate. Though it won’t make you rich overnight, earning more interest on your savings can help you reach your savings goal faster.
What A Lower Federal Funds Rate Means to You
As mentioned earlier, a lower federal funds rate is an expansionary monetary policy used to stimulate demand and encourage people and governments to spend more.
This can show up in your daily life in a few ways. Credit card interest rates will drop, making it less expensive to carry a balance. Loan rates for things like cars, homes and personal loans may also fall, which makes big-ticket purchases more affordable.
On the flip side, though borrowing becomes more affordable, the returns on your savings account or CDs typically decline. That means you may earn less interest on the money you’ve parked in interest-earning accounts.
Frequently Asked Questions (FAQ)
We answer some of the most commonly asked questions about rising interest rates.
What Happens to the Stock Market When the Fed Raises Interest Rates?
When the Fed raises interest rates, borrowing becomes more expensive for both businesses and consumers. This can lead to slower growth and lower consumer spending, which tends to make investors more cautious. As a result, stock prices often dip when interest rates rise.
Who Benefits From High Interest Rates?
Savers benefit from high interest rates because when banks and credit unions raise the interest they pay on savings accounts, CDs and bonds, they get to earn more on their deposits.
What Happens When Interest Rates Rise?
When the Federal Reserve increases the benchmark interest rate for borrowing, both public and private lenders follow suit. As a result, any interest cost included in a purchase is going to go up.
What Are the Disadvantages of Low Interest Rates?
When it comes to spending or borrowing money, there are no disadvantages other than overextending yourself by acquiring too many loans or credit cards. When it comes to savings, though, low interest rates make it unappealing.
Jamela Adam is a personal finance writer covering topics such as savings, investing, mortgages, student loans and more. Her work has appeared in Forbes Advisor, Chime, U.S. News & World Report, RateGenius and GOBankingRates, among other publications.
