Since late 2015, the Federal Reserve has raised the upper limit of its target federal funds rate by 2.25 percentage points, from 0.25% in December 2015, to 2.50% for much of 2019.
But the Fed is no longer raising rates. The question now is whether the Fed will continue to make cuts in the federal funds rate like the first two 0.25 percentage point reductions in July and September 2019, which lowered the federal funds target rate from 2.50% to 2.00%.
Previously MagnifyMoney analyzed Federal Reserve rate data to illustrate how the rates consumers pay for loans and earn on deposits have changed since the Fed started raising them two and a half years ago. Now, with the Federal Reserve embarking on a series of rate cuts, we’ll be tracking that effect on rates as well.
- Credit card borrowers are currently paying $113 billion in interest annually, up $34 billion from the annual $79 billion they paid prior to the first Federal Reserve interest rate hike in December 2015, making introductory 0% APR deals all the more attractive.
- Meanwhile, depositors earned significantly more from savings accounts. In the 12 months ending in June 2019, depositors earned $39.3 billion in interest on their savings accounts, up $29.3 billion from the $10 billion they earned in 2015.
- According to our analysis, credit card rates are most sensitive to changes in the federal funds rate, almost directly matching the rate change with a 3 percentage point increase since December 2015. Credit card rates will continue to rise in line with the Fed’s rate increases, and if the Fed raises them again, the average household that carries credit card debt month to month will pay over $150 in extra interest per year compared with before the Fed rate hikes began. MagnifyMoney estimates 122 million Americans carry credit card debt month to month.
- Student loan and auto loan rates have also risen — but by less than half as much as credit card rates — in part because they are long-term forms of lending that are less reliant on the short-term federal funds rate. Federal student loan rates are set based on the 10-year Treasury note rate each May.
- Savers at big banks have seen little change, with the average savings and CD account passing through only a fraction of the rate increase. However, that masks a big opportunity for savers who shop around and move deposits to online banks. Online banks have aggressively raised rates, and now often offer rates of more than 2%, versus just 1% in 2015. That’s over 20 times what typical accounts pay.
In addition, MagnifyMoney also looked at the impact on consumer rates the last time the Fed reduced rates in 2007.
Generally, unsecured loans like credit cards and personal loans are more rate-change sensitive than secured loans like autos and home mortgage rates, no matter the direction of the rate change. However, savings products like Certificates of Deposit are a stark exception. Even after 3 years of fed funds rate increases, CD rates generally languished at rock-bottom rates until very recently, and then only increased modestly, relative to other financial products. Compare that to 2007, when it was the product most sensitive to interest rate cuts.
Let’s take a closer look at how the Fed rate hike impacts different financial products:
Credit cards
Most credit cards have a rate that’s directly based on the prime rate, for example, the prime rate plus 9.99%. As a result, card rates tend to move almost immediately in line with Fed rate changes. In the current cycle, the rates on all credit card accounts tracked by the Federal Reserve have increased 3 points, even more than the Fed’s increase of 2.25 points.
Although it’s too early to tell, we expect a similar decline in credit card APRs as the Fed continues to pare rates. And consumers can still find attractive introductory rate offers.
For example, introductory 0% balance transfer offers have continued to have long terms even as the Fed hiked rates, with offers still available for nearly two years at 0%.
Credit card issuers make up for the rate hike with the automatic rise in variable back-end rates, as well as the increasing spread between the prime rate and what consumers pay on new accounts. They can also increase other fees, like late payment fees or balance transfer fees to keep long 0% deals viable.
The Federal Reserve tends to hike up interest rates gradually over time. And people in credit card debt will barely notice the rate increase in their monthly statement. When rates are increased by 0.25%, the monthly minimum due on a credit card will increase $2 for every $10,000 of debt.
Similarly, monthly minimums may decline with rate reductions – though cards typically have monthly minimum payments of at least $20. But making minimum payments could mean years of paying off credit card debt and accumulating interest. The best ways to lock in lower rates are by leveraging long 0% balance transfer deals or by consolidating into fixed rate personal loans.
Savings accounts
On average, savings account rates haven’t changed much since the Fed started raising rates. That’s largely because big banks with the biggest deposits and large branch networks have less incentive to offer higher rates, and this skews national data on rates earned because most savers don’t shop around to find higher rates at online banks and credit unions.
Consumers who shop around can find much higher savings account rates than three years ago, and shopping around for a better rate on your deposits is one of the best ways to make the Fed’s rate hikes work in your favor.
Back in 2015, it was rare to see savings accounts pay 1% interest.
Today, many online banks are competing for deposits by offering savings account rates in excess of 2%, flowing through about half of the Fed’s rate hike into increased rates for depositors. These rates will continue to rise as the Fed hikes rates. The increases are already apparent in the data. Depositors are currently earning more than $39 billion in interest on their savings accounts annually, versus $10 billion in 2015.
CDs
CD rates have moved faster than savings rates, up 0.41 points for 12-month CDs since the Fed started raising rates. That’s in part because they are a more competitive product that forces consumers to rate shop when they expire at the end of their 6-month, 12-month or longer term.
But that rate rise doesn’t fully reflect what some smaller banks are passing through, as the banks with the largest deposits have been slow to raise rates.
Recently rates on 1- and 2-year CDs at online banks had been increasing rapidly to well over 2%, reflecting much of the Fed’s rate increases since 2015. The rates on 5-year CDs also began to increased, with some banks offering 60-month CDs with rates above 3.00%. Although rates have started to recede from those highs, CD rates are still well above their 2017 levels.
One reasonable strategy would be to invest in short-term (1- and 2-year) CDs. If competition on the short end continues, you can get the benefit in a year on renewal.
Student loans
Federal student loan rates are set based on a May auction of 10-year Treasury notes, plus a defined add-on to the rate. Today, rates for new undergraduate Stafford loans stand at 4.53%, up from 4.30% before the federal funds target rate began to rise.
Since student loan rates are determined by the 10-year Treasury rate, rather than a short-term rate, they are less directly related to changes in the federal funds rate than some shorter-term forms of borrowing like credit cards. Instead, future market views of inflation and economic growth play a role. Federal student loan rates are capped at 8.25% for undergraduates and 9.5% for graduate students.
For private refinancing options, rates depend on secondary markets that tend to follow longer-term rates, rather than the current federal funds rate, but in general, a rising rate environment could mean less attractive refinancing options.
Personal loans
Personal loan rates tend to be driven by many factors, including an individual lender’s view of the lifetime value of a customer, funding availability and credit appetite. Most personal loans offer fixed rates, and in a rising rate environment overall, we expect these rates will go up, making new loans more expensive, so consumers on the fence should consider shopping for a good rate sooner rather than later. Since the end of 2015, rates on 2-year personal loans tracked by the Federal Reserve have increased by 0.24 basis points.
Auto loans
Prime consumers who shop around for an auto loan can still find very low rates, especially when manufacturers are offering special financing deals to move certain car models.
But the overall rates across the credit spectrum have gone up since the Fed raised rates, in part due to the rate hikes and because of recent greater than expected delinquencies in some parts of the auto lending market.
Mortgages
Since the Fed started raising rates in late 2015, the average 30-year fixed mortgage is now sightly lower than the 3.90% rate in December 2015. The mortgage market tends to follow trends in longer term bond markets, like the 10-year Treasury, since mortgages are a longer-term form of borrowing. That shields them from the impact of Fed rate hikes, and it’s not unusual for mortgage rates to decline during some periods when the Fed is raising rates.
What can consumers do
Even if rates are no longer going up, life is still expensive for debtors, and more rewarding for savers than in recent years.
If you are in debt, now is the time to lock in the lowest rate possible. There are still plenty of options at this point in the credit cycle for people to lock in lower interest rates.
If you are a saver, ignore your traditional bank and look online. Take advantage of online savings accounts and CDs to earn 20 times the rate of typical big bank rates.
Virtual Bank, a division of IBERIABANK, is currently offering an introductory rate on their money market account that is the highest available. This rate is guaranteed for 12 months and will adjust to the standard rate that is in effect at the time. New customers can earn the 2.36% APY by depositing a minimum of $100. While there isn’t a minimum balance requirement to earn the APY, there is a balance requirement to avoid incurring the $5 monthly service fee. All you’ll have to do is maintain a daily minimum balance of $100 and they’ll waive the monthly fee. While this account doesn’t have any check writing capabilities, you can easily move money in and out of the account via ACH. Virtual Bank has a mobile app, that has the mobile check deposit feature, in addition to their online banking platform.
Northpointe Bank, is a fairly large bank located in Grand Rapids, MI. They have over $1 billion in assets and have only been around since 1999. Currently, they’re offering a 2.30% APY on their money market account. While you’ll only need $1,000 to open the account, you’ll have to have a minimum balance amount of $25,000 to earn the high APY. If you have a balance between $1,000 and $2,500, you’ll earn an APY of 0.20%. If your balance is between $2,500 and $25,000, you’ll earn 0.25% APY. Once your balance exceeds $1 million, the APY will drop to 2.30%. This account comes with a debit card and checks. Northpointe Bank does not charge a monthly maintenance fee, but will charge a $15 Excess Transaction Fee each time you exceed six certain transactions a month. The offer online banking and have a mobile banking app.
Western State Bank was chartered in 1902 as the Bank of Webster due to its location in Webster, North Dakota. In 1966, a group of people purchased the Bank of Webter and in 1968, this group of individuals moved the bank’s headquarters to another part of North Dakota and changed its name to Western State Bank. At that time, the bank had $600,000 in assets. Today, the bank has over $1 billion dollars in assets and serves customers nationwide.
MemoryBank is the online division of Republic Bank & Trust Company. While this online division launched in 2016, its parent company has been around since 1982 and has over $5 billion in assets. Currently, MemoryBank is offering a 2.25% APY on its Online Money Market Account. You’ll need a minimum of $50 to open the account, but you won’t need to maintain this amount to earn the APY. The account doesn’t come with a monthly service fee, but it also doesn’t have check writing capabilities or ATM access. MemoryBank does have a mobile banking app to help you manage your account on-the-go.
Customers Bank was founded as Century Bank in 1997 and rebranded in 2011 to the name we know today. The bank has acquired over $10 billion in assets since it opened its doors. If you have a minimum of $25,000 to deposit and are looking to save that money, Customer Bank’s Ascent Money Market Savings Account may be just what you need. If you’re able to fund the account within 30 days of application approval, you lock in a minimum APY of 2.25%. Customers Bank is currently guaranteeing this rate through June 30, 2020. The language on the Ascent page states, “The minimum rate of 2.25% APY is guaranteed thru June 30, 2020.” This implies that if the bank increases the rate on this account, customers will benefit from the rate increase. There isn’t a monthly service fee and there isn’t an excess transaction fee if you happen to make more than six transactions in a statement cycle. You will simply receive a warning letter each time you exceed six transactions and the bank will close your account if you’re sent a third warning letter. The bank encourages accountholders to use this account to hold savings, so there aren’t any check-writing capabilities or ATM/debit cards issued with this account. The bank also limits ACH transfers to $5k per day and $50k per statement cycle. If you choose to wire money from an external account to fund this account, the bank will waive the $10 incoming wire transfer fee. The guaranteed rate makes this account a great option for true savers with at least $25,000 to deposit.
Investors eAccess is a new division of Investors Bank and launched at the beginning of April 2019. Powered by a bank that has over $26 billion in assets, it was able to show up in the market with a high-yield money market account. There isn’t a minimum deposit to open nor is there a minimum balance to earn the high APY. Once you open the account, you can start earning the 2.10% APY. You can fund the account via ACH or by sending Investors eAccess a check by mail. This account doesn’t offer check-writing capabilities and it doesn’t come with a debit or ATM card. You can withdraw money via ACH. You can only withdraw less than $250,000 per monthly statement cycle. Remember that money market accounts have the same limitation as savings accounts, so you can only make six certain transactions per monthly statement cycle. You can do all of your banking online or you can download Investors Bank’s mobile banking app. The bank has not created a specific app for Investors eAccess, but its website claims that you can manage this account from that app.
