How the Federal Reserve's Interest Rate Decisions Affect Your Wallet

When the Fed raises or cuts rates, it changes what you pay on credit cards, car loans and mortgages — and what you earn on savings. Here's how.

Few news stories move markets as much as a Federal Reserve announcement. But the Fed's decisions are not just for Wall Street. They ripple out to the interest rate on your credit card, the cost of a new car loan and the return on your savings account.

What is the Federal Reserve?

The Federal Reserve, usually called "the Fed," is the central bank of the United States. Congress created it in 1913 through the Federal Reserve Act. It is made up of a Board of Governors in Washington, D.C., and 12 regional Federal Reserve Banks across the country.

Congress has given the Fed what is often called a dual mandate: to promote maximum employment and stable prices. In practice, the Fed aims for inflation of 2% over the long run, measured by an index called Personal Consumption Expenditures (PCE).

Who makes the decision?

Interest rate decisions are made by the Federal Open Market Committee (FOMC). It has 12 voting members: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the other 11 regional bank presidents, who rotate each year. The FOMC holds eight regularly scheduled meetings a year, and each one ends with a public statement.

The federal funds rate

The FOMC sets a target range for the federal funds rate — the rate banks charge each other for overnight loans. You never pay this rate directly, but it works like the first domino. When it rises, banks' own borrowing costs rise, and they pass those costs on to customers. When it falls, borrowing generally gets cheaper.

How it reaches your wallet

• Credit cards: Most card rates are variable and tied to the prime rate, which moves almost in lockstep with the federal funds rate. A rate change usually shows up on your card within a billing cycle or two.
• Savings accounts and CDs: Higher Fed rates tend to bring higher yields on high-yield savings accounts, money market accounts and certificates of deposit. Cuts usually lower them.
• Car loans: New auto loans tend to follow the Fed's direction, though your credit score matters a great deal too.
• Mortgages: Fixed mortgage rates are not set by the Fed directly. They follow longer-term borrowing costs, especially the 10-year Treasury yield, which reflect what investors expect the Fed and inflation to do over many years. Adjustable-rate mortgages and home equity lines of credit react more directly.
• Jobs and prices: Higher rates cool spending and borrowing, which can slow inflation but may also slow hiring. Lower rates do the opposite.

Why the Fed raises or cuts

When inflation is running well above 2%, the Fed may raise rates to slow the economy and bring prices under control. When the economy weakens and unemployment rises, it may cut rates to encourage borrowing and spending. Much of the news coverage before a meeting is about predicting which way the Fed will lean.

Other tools in the toolbox

Besides rates, the Fed can buy large amounts of Treasury bonds and mortgage-backed securities to push long-term rates down — known as quantitative easing. Letting those holdings shrink over time is called quantitative tightening. Four times a year, the Fed also publishes a Summary of Economic Projections, including the "dot plot," which shows where each official expects rates to go.

This guide is for general education and is not financial advice.

Common questions

Does the Fed set my mortgage rate?

Not directly. The Fed sets a target for the federal funds rate, an overnight borrowing rate between banks. Fixed mortgage rates are driven mainly by longer-term bond yields and lenders' own pricing, though both are influenced by what markets expect the Fed to do.

Why would the Fed want to slow the economy?

When demand for goods and services runs ahead of what the economy can produce, prices rise quickly. By making borrowing more expensive, the Fed aims to cool demand enough to bring inflation back toward its 2% goal without causing a recession. Getting that balance right is difficult, which is why its decisions are so closely watched.

What can I do when rates are rising or falling?

When rates rise, paying down variable-rate debt like credit cards becomes more valuable, and savers can shop for higher-yield savings accounts. When rates fall, it may be a good time to look at refinancing fixed-rate debt. Our guide on building a good credit score explains how to qualify for the best rates either way.