Fed holds rates steady; here's what that means for your wallet

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The Federal Reserve‘s decision Wednesday to keep interest rates steady came as a relief to many investors.

And that trend may continue. The Fed also indicated in a statement that no more hikes likely will be coming this year. In a unanimous move, the central bank’s policymaking Federal Open Market Committee took a sharp dovish turn from policy projections just three months earlier.

The Fed has already raised the federal funds rate nine times in three years, and those previous hikes are benefiting many consumers in the form of better savings yields.

Here’s what Wednesday’s decision means for your wallet.

As a result of the increase in interest rates, savings rates — the annual percentage yield banks pay consumers on their money — are now as high as 2.4 percent, up from 0.1 percent, on average, before the Federal Reserve started increasing its benchmark rate in 2015. (You can earn even more with certificates of deposit.)

In 2018, high-yielding savings accounts even outperformed the stock market for the first time in over a decade.

With an annual percentage yield of 2.4 percent, a $10,000 deposit earns $240 after one year. Over the same period, investors would have lost money in the stock market, after the S&P 500 and Dow Jones Industrial Average ended last year by finishing in the red.

With a pause in interest rate hikes, savers won’t continue to see the same upward momentum, but they can still reap the benefits of those significantly higher savings rates by switching to an online bank. (Online banks are able to offer higher-yielding accounts because they come with fewer overhead expenses than traditional bank accounts.)

On the flip side, a pause in rate hikes may mean a reprieve in escalating borrowing costs, which can impact your mortgage, home equity loan, credit card, student loan tab and car payment.

Here’s a breakdown of how that works:

Credit card rates are already at a record high of 17.85 percent, on average, according to Bankrate.

Most credit cards have a variable rate, which means there’s a direct connection to the Fed’s benchmark rate. As the federal funds rate rises, so does the prime rate, and credit card rates follow suit. Cardholders would see the impact within a billing cycle or two.

The average American household is already carrying $6,929 in credit card debt month to month and paying a $1,141 annually in interest, according to personal finance website NerdWallet.

Tacking on a 25-basis-point increase, for example, would cost credit card users roughly $1.6 billion in extra finance charges, according to a separate WalletHub analysis. Because of the previous rate hikes, credit card users paid about $11.26 billion more in 2018 than they would have otherwise, WalletHub said.

The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes, so there’s already been a spike since the Fed started raising rates.

The average 30-year fixed rate is now about 4.49 percent, up from 4.09 percent in 2015. That has cost the average homebuyer roughly $42,000, WalletHub found.

Many homeowners with adjustable-rate mortgages or home equity lines of credit, which are pegged to the prime rate, are also affected when the Fed raises rates. While some ARMs reset annually, a HELOC could adjust within 60 days.

For those planning on purchasing a new car, Fed decisions likely will not have any big material effect on what you pay. For example, a quarter-point difference on a $25,000 loan is $3 a month, according to Bankrate.

Currently, the average five-year new car loan rate is 4.74 percent, up from 4.34 percent when the Fed started boosting rates, while the average four-year used car loan rate is 5.49 percent, up from 5.26 percent over the same time period, according to Bankrate.

However, tack on rising auto prices and longer loans to climbing interest rates, and car buyers may end up with sticker shock. A buyer who finances a purchase could pay about $6,500 more than five years ago, according to research from Edmunds.com.

While most student borrowers rely on federal student loans, which are fixed, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings.

Private loans may be fixed or may have a variable rate tied to the Libor, prime or T-bill rates, which means that if the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.

(A college education is now the second-largest expense an individual is likely to incur in a lifetime — right after purchasing a home. The average graduate leaves school $30,000 in the red, up from $10,000 in the early 1990s.)

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