Written by: Internal Analysis & Opinion Writers
Americans could soon face another increase in borrowing costs as the Federal Reserve prepares for a highly anticipated interest rate decision. Financial markets widely expect policymakers to raise the federal funds rate by a quarter percentage point, a move intended to combat renewed inflation pressures but one that could also make credit cards, auto loans, and certain home loans more expensive.
The Federal Reserve is scheduled to announce its decision Wednesday following its two-day policy meeting. A quarter-point increase would raise the target federal funds rate from its current range of 3.50% to 3.75% to a new range of 3.75% to 4.00%. If approved, it would represent the central bank's first interest rate increase in more than three years.
The anticipated move follows another troubling inflation report. The Consumer Price Index increased 3.4% over the 12 months ending in August, with higher oil and gasoline prices contributing significantly to the increase. Federal Reserve Chairman Kevin Warsh has emphasized the central bank's commitment to returning inflation to its 2% target.
Consumers do not directly pay the federal funds rate, which governs overnight lending between banks. However, changes in the benchmark rate ripple throughout the financial system and influence the interest rates households encounter when borrowing or saving money.
Credit card borrowers could experience some of the quickest effects. Most credit cards carry variable interest rates tied to the prime rate, which generally moves alongside changes in the federal funds rate. If the Fed raises rates, consumers carrying balances could see their annual percentage rates increase within one or two billing cycles.
"Credit card rates, which are above 20%, will rise once the Fed moves to raise rates, likely to record highs," Mark Zandi, chief economist at Moody's, told CNBC.
Auto financing could also become more expensive for consumers taking out new loans. Existing fixed-rate auto loans would not change, but borrowers purchasing vehicles after a Fed increase could encounter higher financing costs. According to an analysis cited by CNBC, the average annual percentage rate on a 48-month new-car loan could rise by approximately 12 basis points in the months following a quarter-point Fed increase.
Mortgage borrowers face a more complicated situation. Thirty-year fixed mortgage rates do not move directly with the federal funds rate. Instead, they are influenced more heavily by longer-term bond yields, particularly the 10-year U.S. Treasury. The 10-year Treasury yield recently moved above 4.95%, its highest level since October 2023, while the average 30-year fixed mortgage rate climbed above 7% for the first time in more than a year.
"A Fed hike would not automatically mean higher 30-year mortgage rates," Jeff DerGurahian, LoanDepot's chief investment officer and head economist, told CNBC.
If investors believe the Fed is taking credible action to control inflation, longer-term Treasury yields could stabilize or even decline despite an increase in the federal funds rate. That could potentially prevent mortgage rates from moving significantly higher.
"If that message lands, longer-term Treasury yields could hold steady or move lower, allowing 30-year mortgage rates to do the same," DerGurahian said. He described such a move as the Fed "tapping the brakes now to keep inflation from gaining speed later."
Other housing-related borrowing products would respond more directly. Home equity lines of credit, or HELOCs, typically carry variable rates linked to the prime rate and could become more expensive almost immediately following a Fed increase. Adjustable-rate mortgages could also eventually reset higher depending on their specific terms and adjustment schedules.
Student loan borrowers would see mixed effects. Existing federal student loans have fixed interest rates, meaning current borrowers would not see their rates increase because of the Fed's decision. Rates on newly issued federal loans are determined separately using Treasury yields. Private student loans with variable rates, however, could become more expensive as market interest rates rise.
There is one group that could benefit from higher rates: savers. Banks and other financial institutions may increase yields on high-yield savings accounts, certificates of deposit, and money market accounts as benchmark rates move higher.
"A potentially overlooked upside to elevated rates is the opportunity to capture higher yields for savings," Mark Hamrick, economic analyst and founder of The Hamrick Brief, told CNBC.
Hamrick also emphasized that consumers should compare available offers rather than assume their current financial institution provides the most competitive rate. "For both borrowing and saving, it is important to shop around for the best rates to avoid overpaying and to maximize returns," he said.
Ultimately, a Federal Reserve rate increase would affect consumers differently depending on whether they are borrowers or savers. Households carrying variable-rate debt could face higher monthly costs, while consumers with cash savings may have opportunities to earn better returns. For homebuyers, the picture is less straightforward because mortgage rates depend heavily on Treasury yields and inflation expectations. Until the Federal Reserve announces its decision, however, a rate increase remains an expectation rather than a confirmed action, making verified economic data more reliable than assumptions about what policymakers will ultimately decide.
