The Federal Reserve has raised its benchmark interest rate for the first time since 2023. At its meeting on the 16th, the Federal Open Market Committee increased the federal funds rate by a quarter percentage point, bringing the target range to 3.75 – 4%.*
The federal funds rate is the interest rate that financial institutions charge each other when they lend reserves. Changes in the rate influence borrowing and savings rates throughout the economy. Raising rates can slow consumer demand and help reduce inflation, which has been “stubbornly above” the Fed’s 2% target.*
For retirees, the impact of this change will depend largely on where their money is, their sources of retirement income, and whether they’re borrowers or savers.
What it Means For Savers
Higher rates can benefit retirees with money in savings accounts, money market funds, or short-term CDs* because financial institutions often increase deposit rates after a Fed hike. Higher returns can also help savings keep pace with inflation, particularly if the Fed succeeds in bringing inflation closer to 2 percent. Since rates vary among banks, and some may offer more generous rates than others, savers may benefit from comparing available offers.
What it Means For Borrowers
A single quarter-point increase is unlikely to dramatically change borrowing costs,* and different types of debt respond differently to Fed policy. For example:
Credit card APRs, which have been declining since reaching a record 21.76 percent in August 2024,* are likely to rise because card rates are closely connected to changes in the federal funds rate.
Rates on new personal loans could also increase slightly from their current average of 12.21 percent.* Existing fixed-rate personal loans generally will not change unless borrowers refinance.*
Interest rates for auto loans don’t closely track the federal funds rate, but could edge higher. Current averages are about 7% for new vehicles and 10.6% for used vehicles.*
Mortgage rates are unlikely to be significantly affected because they tend to follow 10-year Treasury yields rather than the federal funds rate. Recently, rates averaged 6.76% for a 30-year mortgage and 6.09% for a 15-year mortgage.*
Home equity lines of credit (HELOCs) are more closely tied to the federal funds rate. With HELOC APRs currently averaging 7.26%, rates could increase by about 0.25% with this change.*
Looking Ahead
The Fed’s next scheduled meeting is Oct. 27-28. Additional quarter-point increases are expected at that meeting and potentially early next year.* For retirees, the effects will vary, but major financial changes may not be necessary based on a single rate increase.
*Source: AARP
This material is provided for general educational and informational purposes only and is not intended to provide individualized financial, investment, tax, legal, lending, or insurance advice or recommendations. The information presented is based on sources believed to be reliable as of the date of publication; however, rates, market conditions, economic data, and Federal Reserve policy are subject to change without notice. Interest rates and terms available to any individual may vary based on the financial institution, product, creditworthiness, loan terms, geographic location, and other factors.
References to potential future Federal Reserve actions, interest rates, inflation, or other economic conditions are forward-looking in nature and are not guarantees or predictions of future results. Federal Reserve decisions are based on economic conditions and may differ from current projections or market expectations.
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