Here's How the Fed's Rate Hike Will Impact Consumers

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As was widely expected, the Federal Reserve just announced another interest rate hike. This marks the ninth rate increase of the current cycle, and sets the benchmark federal funds rate to a target range of 2.25% to 2.50%.

While Fed rate hikes like this can certainly move the stock market, you may be wondering how this will affect you as a consumer. With that in mind, here's a quick guide to how you can expect the interest rates you pay to react.

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Consumer interest rates that will be affected

Some types of consumer interest rates are directly tied to the federal funds rate, and therefore can be expected to increase immediately as a result of the Fed's rate hike:

  • Credit cards -- Credit card interest rates are variable and are directly tied to the movement of the federal funds rate. Specifically, most credit card interest rates are based on the U.S. prime rate, which itself is derived from the federal funds rate. To make a long story short, this means that the Fed's 25-basis-point rate hike will raise your credit card interest rates by the same amount. For example, if your APR on one of your credit cards was 19.49%, you can expect it to jump to 19.74% as a result of the rate hike.
  • HELOC interest rates -- As with credit cards, the interest rates charged on home equity lines of credit, or HELOCs, are generally variable and are tied to the U.S. prime rate. So, if you have outstanding HELOC debt, you can expect your interest rate to rise. Before this rate hike, the U.S. prime rate was 5.25%, so it will now rise to 5.50%. This means that if your HELOC interest rate is defined as "prime plus 1%," you can expect your rate to rise from 6.25% to 6.50%.
  • Most other variable rates -- There are several other forms of consumer debt that come with variable interest rates, and if they're tied to either the U.S. prime rate or directly to the federal funds rate, they can also be expected to rise.

Consumer interest rates that might be affected

On the other hand, many consumer interest rates are not directly tied to the Fed's interest rate policy. To be clear, consumer interest rates tend to move in the same direction, but here are three key rate types that you shouldn't expect to jump overnight as a result of the Fed's latest rate hike.

  • Mortgage interest rates -- As a general rule, longer-term interest rates tend to have the least correlation with the Fed's rate hikes, and there are few consumer interest rates tied to longer-term loans than mortgages. As I mentioned, mortgage rates and the Fed's rate hikes tend to move in the same direction; this has certainly been true during the current rate-hike cycle. But it isn't a perfect correlation. Over the past three years, the federal funds rate has increased by 200 basis points (two percentage points), while the average 30-year mortgage rare has increased by about 65 basis points. A better indicator is long-term Treasury yields, which tend to move more in tandem with mortgage rates.
  • Auto loan interest rates -- Similarly, auto loan interest rates tend to move in the same direction as the Fed's interest rate moves, but aren't perfectly correlated. Don't necessarily expect auto loan interest rates to jump right away as a result of the Fed's latest rate hike.
  • Savings account yields -- Unfortunately for consumers, the interest rates paid by banks on deposit accounts are not tied to the Fed's rate hikes. As I mentioned, the Fed has hiked interest rates eight times during the past three years, but savings account yields have barely budged for the most part. Sure, there are some high-yield options out there, but the national average savings account interest rate is just 0.09%, according to the Federal Deposit Insurance Corp.

The bottom line on interest rates

The key takeaway: The Fed's latest rate hike can be expected to make life generally more expensive for Americans who borrow money, although not all interest rates will react in the same way. Credit cards and other variable interest rates will rise immediately and predictably, but other types of consumer interest rates are dictated by overall market conditions, and may or may not move significantly in response.

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