How Does the Fed Rate Affect Me?

The U.S. Federal Reserve has long captured attention with each move it makes to the federal rate. The expectation is that when this rate decreases, consumers will in turn see reductions to their borrowing rates. 

But that’s not how it works across the board. There are varying influencers, which mean there can be times — like we’re seeing now — when we see some rates increase and others fall. 

• Consumer interest rates, such as auto loans, credit cards and high yield savings accounts, are closely connected to the federal rate. The federal funds rate is an interest rate that banks use to borrow money from each other overnight. 

• Mortgages and equipment lending, on the other hand, track alongside long-term bond yields that move based on investors’ outlook on the economy further in the future. 

That’s why despite the Fed cutting the benchmark policy rate by an additional 0.25% in December, mortgage rates increased from 6.08% to 6.91% at the start of January, according to Freddie Mac.

Why? The short answer: the bond market. 

Here’s a look at what’s happening: 

Long-term bonds are on the rise.
We saw a spike in the 10-Year Treasury note yield following news that Donald Trump won the presidential election in November. It’s continued to increase, increasing 80 basis points (0.80%) since September.  

 

Economic growth expectations impact rates.
The recent rise in bond rates follows expectations for strong economic growth in the coming months and looming Republican policy changes. Economic growth and inflation typically lead to higher yields on the 10-year Treasury, which then increases mortgage and equipment lending rates. 

 

Analysts caution buyers from waiting for better rates.
Analysts share that interest rate declines do not mean buyers will get a better rate when they apply or be better overall for their situation. Why? A variety of individual factors impact loan rates. That means while the rate may dip slightly, the overall financing result may not be favorable due to other factors or conditions. Learn more: Don’t wait for a better rate.

What’s Next? 

Attention remains focused on the Fed and what may lie ahead for interest rates this year. Fed Chair Jerome Powell indicated that that the central bank is likely to lower rates only twice in 2025. With inflation still above the Fed’s target and the economy expected to grow, the central bank faces additional challenges. The Fed must contend with the effects of fiscal policies under President-elect Donald Trump, who has proposed tariffs, tax cuts, and mass deportations—measures that could fuel inflation.  

 “We need to take our time, not rush, and make a careful assessment, but only after we’ve seen the policies in action and how they’re implemented,” Powell remarked. 

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