How the Federal Funds Rate Affects Your Wallet

Published on: Sep 22, 2021fb-roundtwitter-roundemail-round

Federal Reserve chair Jerome Powell is the face of a lot of gov money moves that affect you. Like changing the federal funds rate – an important percentage that influences everything from inflation to what you pay for loans.

Increasing rates means the Fed thinks the economy’s doing well enough to handle higher borrowing costs. When things don’t look so hot, the Fed can lower rates to encourage people to borrow, spend, and invest...which can help boost the economy. Since COVID-19 had some serious economic side effects, the Fed lowered rates to essentially zero in March 2020. And Powell and co. say they'll likely keep rates low for the rest of the year. But may start raising rates as early as next year – sooner than they previously said.

Here’s what that could mean for your wallet.

Is ‘become a homeowner’ on your to-do list?
  • Buying when interest rates are low can make that dream less expensive. The fed funds rate isn’t directly tied to mortgages, but it can influence them.

  • Right now, mortgage rates are at historic lows. Compare rates from multiple lenders.

  • FYI, lenders got pickier about who they did business with during the pandemic to protect against people defaulting on their loans. They've started to loosen up. But it's never a bad idea to work on your credit score.

Related: 5 Tips for Buying a Home in a Crowded Market

Do you already own a home?
  • Refinancing to a lower interest rate could get you a cheaper mortgage payment.

  • Swapping out your old home loan for a new one may mean paying closing costs again. Do some HW to make sure you’ll save more than you spend.

Are you working on paying off credit card debt?
  • When the federal funds rate goes down, the interest on variable-rate cards can, too.

  • That makes it less expensive – and easier – to pay off your balance.

Do you like making money on your money?
  • Not-so-great news: when rates are low, banks may pay you less to keep money in your savings account.

  • If you’re shopping for a new place to park your money, compare rates at online banks. They usually pay a little more than old-school options.

  • If you don’t need your money for a while, investing gives it a chance to grow faster.

Related: SkimmU: Investing 101

theSkimm

Low interest rates can be good for the economy. They tend to make savers sad, but make it easier to pay off debt.

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Skimm'd by: Ivana Pino, Elizabeth Smith, Stacy Rapacon, and Elyse Steinhaus