How the Federal Funds Rate Affects Your Wallet

Jerome Powell is the finance world’s Cardi B. As the chair of the Federal Reserve (aka America’s central bank), Powell is the face of a lot of gov money moves that affect you. Like changing the federal funds rate. That’s an important percentage that influences everything from inflation to what you pay to borrow money.

Increasing rates means the Fed thinks the economy’s doing well enough to handle higher borrowing costs. But when things aren’t looking so hot, the Fed can lower rates to encourage people to borrow, spend, and invest…which can help boost the economy.

Quick history lesson: the Fed kept rates between 0% and 0.25% during the Great Recession. Then started raising them in 2015 when things were looking better. In March, Powell and co. brought it back to essentially zero. Because a global pandemic can have serious economic side effects. In June, they said low rates are here to stay until 2022.

Here’s what lowering the federal funds rate can mean for your wallet.

If you have credit card debt…low interest rates = big win. The avg interest rate on a new credit card is already 16%. That’s high. But when the federal funds rate goes down, rates for variable-rate cards usually do, too. That makes it less expensive – and easier – to pay off your balance.

If you’re a saver…low interest rates are kind of a bummer. It means banks might pay you less to keep money in your savings account. Pro tip: If you’re in the market for a new savings account, check rates at online banks. They usually pay a little better than old-school options.

If you’re house hunting…spring for the mansion. JK. Stick with your budget and enjoy any potential savings from lower rates when you buy or refinance. While the federal funds rate isn’t directly tied to mortgage rates, it can influence them. Just know that lenders have gotten pickier about who they do business with in order to protect against people defaulting on their loans. And house-hunting in a pandemic is…complicated. Thanks, COVID-19.

theSkimm: Super-low interest rates tend to make savers sad. But it’s good news for anyone with credit card and other variable-rate debt. If you’ve been carrying a credit card balance, take advantage of the good news by paying off a little more if you can.


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