What the Fed's interest-rate increase means for you

The Federal Reserve raised its short-term benchmark rate by one quarter of a percentage point on Wednesday. This widely expected decision increases the federal-funds rate to between 0.25% and 0.50%.

You'll feel the impact of rising rates on an individual level and on a household level. When interest rates go up or down, the resulting changes in other rates impact the way we borrow money, but also how we save money.

Frustrated house hunters, for example, have already seen mortgage rates increase in recent months. Rising rates mean home buyers will pay a little more each month in mortgage payments.

"Raising the interest rate is about creating an inducement to save," said Laura Veldkamp, professor of finance and economics at Columbia University. "It's basically a deterrent to consumption spending. When an economy is overheated, raising the interest rate is a way to pull back and say, 'I'll hold on and postpone that spending.'"

Below, a guide to when these changes might happen and a few things to watch as more interest-rate increases are expected this year.

Mortgages

The way mortgage prices are set is based largely on the yield of the 10-year U.S. government bond, also known as Treasury note. This rate is used as a benchmark for all different types of loans, including mortgages. When the Fed raises rates, this pushes the yield on the Treasury note higher. This will then in turn push mortgage rates higher.

As the Fed has signaled higher rates, the 10-year yield has moved higher. This has in turn pushed the average rate on a 30-year fixed rate mortgage to 3.85% as of the week of March 9, and a year ago it was 3.05%, according to Freddie Mac.

Over the past two years, low rates and low inventory have fueled a white-hot housing market, with skyrocketing home values leading to fierce bidding wars. As of January, the median sales price of a single-family home stood at $357,100, up nearly 16% year-over-year, according to the National Association of Realtors.

The prospect of higher rates has begun to reduce refinancing demand, and rising mortgage rates will likely create even more difficulty for those hunting.

"We'll likely see some decline, or at least a slowdown," Prof. Veldkamp said of mortgage volume.

High-Yield Savings Accounts and Certificates of Deposit

Right now, banks have little incentive to raise interest on savings accounts. During the pandemic, Americans have been hoarding cash, leading to the highest personal savings rate since World War II, then edging down in recent months.

"The traditional view is that rising interest rates help savers, but most people who are savvy are in a broader range of assets," said Caroline Fohlin, professor of economics at Emory University. "For your average person who just has their money in a savings account, you make nothing."

The interest rates offered on savings accounts and many certificates of deposit often move with the federal funds rate. According to the FDIC, the average annual percentage yield on a one-year CD is 0.14%. Goldman Sachs Group Inc.'s Marcus account is now offering 0.50%. Online banks like Ally are also offering 0.50% for their high-yield savings products.

"Low interest rates very much affected savers," said Fernando Martin, assistant vice president at the Federal Reserve Bank of St. Louis. "People were looking for alternative investments and yield, which always implies more risk. As interest rates go up, CDs will go up, which should perhaps help savers a little bit more."

Auto Loans

When you take out a car loan, that loan has a fixed interest rate pegged to Treasury yields. This means the rise in interest rates shouldn't bring any surprises for those who have already secured their fixed rate.

For those looking to buy in the hot car market, make sure you do the math on financing a vehicle.

In addition, keep in mind that individual car dealers and lenders can charge different amounts for your specific new car loan. According to Bankrate.com, the average rate on a five-year new car loan was 3.98% the week of March 10.

Credit Cards

"It's always an excellent time to pay down credit card debt, but this makes it only more costly to hold credit card debt," said Kristen Euretig, financial planner and founder of Brooklyn Plans.

According to WalletHub's March report of more than 1,500 credit-card offers, the annual percentage rate for those with good credit was 18.98%. An increase in interest rates can sometimes affect the credit card annual percentage rate, or APR.

In previous reporting, The Wall Street Journal found that some credit-card rates are going up regardless of interest rates. As generous rewards and points programs become more popular, these perks are costing banks more, leading many to raise rates to cover such costs.

Student Loans

For those with federal loans, interest rates have already been set for the 2021-2022 school year.

Every May, the interest rate for federal student loans is set according to the 10-year Treasury note auction. These rates are fixed for the entirety of the life of the loan. The rate for direct subsidized and unsubsidized undergraduate loans is currently 3.73 % until June 2022, according to the U.S. Department of Education. Next year, the rate increase could impact loans distributed for the following academic year.

Private education loans, however, could be affected by the rise in rates. Private student loans either charge fixed rates, which stay consistent, or variable rates, which can increase or decrease depending on the institution you borrow from or your individual financial circumstances.