On the 16th, the Federal Reserve raised its benchmark interest rate by 25 basis points to a range of 3.75%–4.00%—the first rate hike since the summer of 2023—driven primarily by inflation remaining above the 2% target. This move will increase borrowing costs for mortgages, auto loans, and credit cards, though interest rates on savings and time deposits are expected to rise.
According to the Associated Press, the Department of Labor previously reported that the Consumer Price Index (CPI) rose 3.4% year-over-year and 0.4% month-over-month in August, with the monthly growth rate quadrupling compared to July. Inflation has remained above the Fed’s 2% target for more than five consecutive years. Federal Reserve official Kevin Warsh stated that policymakers “cannot tolerate persistently high inflation.” He remarked on the 16th that raising interest rates benefits low-income Americans, as they are the hardest hit by high prices.
Following this rate hike, anyone financing a home, car, or major appliance will ultimately be affected. Those carrying credit card debt will also see their monthly payments rise. Matt Schulz, an analyst at LendingTree, noted that while a single quarter-point hike has a limited impact, “when these hikes happen one after another and accumulate over time, they become a much heavier burden.”
As for the impact on savings, interest rates on standard deposits and certificates of deposit (CDs) may rise. The Federal Reserve Bank of St. Louis notes that the average interest rate on a one-year CD was just 0.15% before the inflation surge of 2022; it rose to 1.88% in September 2024, has remained above 1.5% since then, and stood at 1.71% last month. High-yield accounts at online banks often aggressively compete for deposits but frequently require higher minimum balances.
Additionally, mortgage rates do not necessarily track the Federal Reserve—at least not directly—but instead follow the yield on 10-year Treasury bonds. Driven by soaring energy prices and ballooning government debt, the 10-year Treasury yield surpassed 5% on the 14th, marking the first time it has done so since 2023. The rate for a 30-year fixed mortgage rose to 6.76% last week, hitting a high not seen in over 14 months.
Regarding credit cards and auto loans, most credit cards utilize variable rates that track the bank prime rate. Researchers at the Federal Reserve Bank of Boston point out that adjustments to the Fed’s benchmark rate are quickly reflected in credit card interest rates. Schulz estimates that interest rates on most credit card debt will rise by a quarter of a percentage point in the coming months.