On Wednesday the Fed did something it had not done since 2023: it raised interest rates. Most coverage will be about markets, but the more useful question is closer to home. Which of your accounts feels this first, and which one makes you wait?
On September 16 the Federal Open Market Committee voted 12 to 0 to raise the federal funds rate, the overnight rate banks charge each other to borrow, by a quarter of a percentage point to a range of 3.75% to 4.00%. The committee’s explanation was three words long: inflation remains elevated.
Fed chair Kevin Warsh was clearer at the press conference about the limits of the tool. “We cannot affect any individual price,” he said, pointing to oil and groceries. What the Fed can do, he said, is keep a jump in a few prices from broadening out into everything else. And they may not be finished. Of the 18 officials submitting projections, 16 see at least one more quarter point hike this year.
It is, mostly, and this is the interesting part. August’s Consumer Price Index came in at 3.4% compared with a year earlier, the same as July. But core inflation, which leaves out food and energy because those two swing hard month to month, fell to 2.4%. That is the lowest reading since March 2021.
So the underlying trend looks decent. Energy is the problem. Gasoline was up 27.4% from a year ago and fuel oil rose 52%, while shelter eased to 3.0% and food to 2.7%. What goes in your tank is doing most of the damage, and the Fed is worried it will seep into the price of everything else.
Here is the piece that touches your budget. Anything carrying a variable rate, meaning credit cards, home equity lines of credit, and some private student loans, is tied to the prime rate, which tracks the Fed almost immediately. That repricing usually shows up within one or two billing cycles.
The average credit card APR sat at 19.25% in September, and a brand new card offer averaged 23.82%. The average balance carried in the second quarter was $6,610. A quarter point on that is about $1.38 more in your minimum payment, which on its own is nothing. What matters is the direction, and 19.25% was already expensive money before the Fed touched anything.
In theory a rate hike is a gift to savers. In practice, banks raise deposit rates slowly and cut them quickly. NerdWallet counted more high yield accounts lowering rates since June than raising them.
The hike is not really the story here. The gap is. As of mid August the FDIC put the average savings account APY, the annual percentage yield, or what a dollar earns you over a year, at 0.38%. High yield online accounts are paying north of 4%, with Axos at 4.21% and Newtek at 4.20%, and short term CDs reaching 4.50%. On $10,000 that is the difference between roughly $38 a year and roughly $420.
Worth saying plainly, because this trips people up. If you have a 30 year fixed mortgage, a fixed rate car loan, or federal student loans, Wednesday changed nothing about your payment. Fixed means fixed. Only new borrowing and variable rate balances move.
New mortgages follow the 10 year Treasury yield, not the Fed. The 30 year fixed averaged 6.76% this week, up from 6.35% a year ago, and some lender screens showed 7.07% on Thursday, the first print above 7% in over a year. One consolation for buyers: existing home sales fell 2% in August to an annual pace of 3.98 million while inventory climbed 3.2%, leaving 4.9 months of supply, the most in over a decade. Fewer rival bidders can beat a tenth of a point on the rate.
Do not rebuild your finances around a quarter of a percentage point. Do let it nudge you to fix the two things already quietly costing you: cash sitting in a 0.38% account, and a balance sitting at 19.25%. Those gaps are worth more than anything the Fed does before December, and unlike the Fed, you can act on both this afternoon.
The Fed meets again on October 27 and 28. Between now and then, the gap between 0.38% and 4.20% is entirely yours to close.
