How consumer borrowing and savings rates are affected

The Federal Reserve raised its benchmark interest rate at the conclusion of its September meeting after consumer prices rose again in August amid the war with Iran — and despite continued pressure by President Donald Trump to bring rates down.

In an effort to tame inflation, the central bank’s Federal Open Market Committee, led by Chairman Kevin Warsh, raised the federal funds rate by one-quarter percentage point to a target range of 3.75% to 4.0%. The move is expected to ripple across the economy, with consequences for everything from credit cards and car loans to savings accounts.

The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. While consumers do not borrow at that rate directly, Fed policy has a significant impact on consumer borrowing costs and savings returns.

In general, short-term consumer borrowing rates are closely tied to the prime rate, which is typically 3 percentage points higher than the federal funds rate. Longer-term interest rates are driven more by inflation expectations and broader economic conditions.

This quarter-point hike — the first since July 2023 — will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing, putting some U.S. households under increased financial strain.

“Wealthier and generally older households will navigate higher rates better, as they are less likely to need to borrow and, if they have any debt, it is a low-rate mortgage loan they locked in during the pandemic,” said Mark Zandi, chief economist at Moody’s. “They are also more likely to have savings accounts that will earn higher rates.” 

Even though Trump has argued that maintaining a federal funds rate that is too high puts the U.S. at an economic disadvantage, tighter monetary policy is intended to slow spending and borrowing, helping to cool the economy and ease inflationary pressures.

“A rate hike is great news for savers, but it stinks for borrowers. It means that you’ll get better returns on high-yield savings accounts and [certificates of deposit], but you’ll also see higher interest rates on your credit cards,” said Matt Schulz, LendingTree’s chief consumer finance analyst.

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit within a few billing cycles.

“Cardholders should expect their credit card’s APR to rise a quarter-point in the next couple of months following the Fed’s move,” Schulz said. “For most people, this one rate increase won’t amount to more than a dollar or two added to their monthly bill, but for those already struggling with card debt, any increase is definitely unwelcome.”

Combined, a 25-basis-point hike will cost credit card users roughly…