Mortgage Rates

What the Fed’s near-zero price coverage means on your pockets


Although the federal funds rate – which banks charge each other for short-term borrowing – is not the interest consumers pay, the Fed’s moves still affect the loan and savings rates they see on a daily basis.

The Fed’s historically low lending rates make it easier to access cheaper credit, but it also makes it less desirable to hoard cash.

Here’s a breakdown of how consumers can benefit from this simple monetary policy while it lasts.

Borrowers get a leg up

For starters, homeowners have an unprecedented opportunity to refinance or get some cash out of their home at record low rates.

According to Bankrate, the average 30-year fixed rate home loan is around 3.04%, the lowest since February.

“The ability to refinance a mortgage and cut your payment by $ 150 to $ 200 a month creates valuable headroom on the household budget,” said McBride.

The ability to refinance a mortgage and cut your payment by $ 150 to $ 200 per month creates precious air to breathe.

Greg McBride

Bankrate’s chief financial analyst

Once the Fed begins to slow the pace of bond purchases, long-term mortgage rates will inevitably rise as the economy and inflation affect them.

Many homeowners with adjustable rate mortgages or home equity lines of credit that are linked to the base rate will also be affected. While some ARMs are reset annually, a HELOC could adjust within 60 days.

The same goes for other types of debt, particularly credit cards.

According to Bankrate, credit card rates are now only 16.16%, up from a high of 17.85%.

If the federal funds rate goes up, the base rate will go up, too, and credit card rates will catch up, since most credit cards have a floating rate, which means they are directly linked to the Fed benchmark. Cardholders will see the impact within a billing cycle or two.

For now, borrowers can use a home equity loan or a personal loan to consolidate and pay off high yield credit cards.

The average personal loan rate is 10.77% and a line of credit for home equity loans is only 4.24%, according to Bankrate.

When it comes to college debt, even student borrowers are given a break thanks to the CARES law, which suspended repayments on federal student loans until September.

This is a great time to keep up with payments, McBride said. “If federal student loan interest doesn’t pile up, you can really improve the principle a lot,” he said.

Savers need to be resourceful

Those who keep cash will find it harder to take advantage of low interest rates.

Although the Fed has no direct influence on deposit rates, they tend to correlate with changes in the federal target rate, meaning that savers make next to nothing on their money.

Since March 2020, when the Fed cut its key interest rate to near zero, the average return on online savings accounts has fallen from 1.75% to 0.45%, according to founder Ken Tumin.

At some of the largest retail banks, the average savings rate is even lower, a mere 0.06% or less.

“In addition to the Fed’s policy, the record level of bank deposits together with weak credit demand has contributed to the record-low deposit rates,” said Tumin. “This is likely to be a headwind for deposit rates even if the Fed starts raising its policy rate,” he added.

If the inflation rate is higher than the savings book rates, the money saved will lose purchasing power over time.

Investors worried that inflation will undermine the value of their money may want to be more proactive when it comes to the fixed income portion of their portfolio.

One way to do this is through Treasury’s inflation-linked securities. Stocks and mutual funds will beat inflation in the long run, but you’ll need to take more risks at an especially precarious time, according to Giles Coghlan, chief currency analyst at HYCM.

While equity investments have appreciated over the past few months as global indices hit unprecedented highs, this is mainly due to the support they have found from loose monetary policy, noted Coghlan.

As soon as the Fed signals the end of its loose monetary policy, “the equity markets will fall, which will affect those involved in that market.”

“Diversify across a range of investments that would perform well in different circumstances,” advised Columbia’s Ma. “Some protection is good,” she said, but “don’t put all your eggs in the basket of high inflation.”

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