Here's what a Fed rate hike means for your mortgage, car loan and credit cards

The Federal Reserve raised interest rates Wednesday for the first time since 2023, but that won’t mean the mortgage rate or car loan you’ve been eyeing will suddenly shoot up.

Fed action is one piece of the puzzle in how banks determine loan rates and could contribute to a trend of interest rates slowly rising over time.

Here’s what a rate increase means for your mortgage, car loan, savings account and more.

What does a Fed rate hike mean?

The Fed’s action sets the federal funds rate, or the standard rate for how banks borrow money from each other. That means banks will need to consider charging customers a higher interest rate to still make a profit because they are paying more to borrow the money in the first place.

But that doesn’t directly change what banks charge customers to borrow money for, say, small-business loans or car loans. The Fed’s rates are short-term, and while it influences longer-term loan rates, it does not control them.

The amount of movement depends on the type of loan you’re considering.

What does this mean for mortgages?

Mortgage rates probably won’t spike immediately. At least, not in response to the rate hike.

Fixed-term mortgage rates are more influenced by Treasury bond yields, which are determined by investors’ views of the economy as a whole.

Global bond yields have been soaring recently as investors grow concerned about rising government debt, geopolitical conflict, persistent inflation and whether central banks around the world will increase interest rates to try to bring costs down.

The 10-year Treasury yield, a benchmark that influences mortgage rates and other borrowing costs, briefly rose above 5 percent on Monday, the first time it hit that mark since 2023. Mortgage rates have risen significantly this year, hitting 6.76 percent on average for a 30-year fixed-rate loan last week.

That’s in stark contrast to the drop analysts expected to see at the beginning of the year. But rising oil prices caused by the war in Iran have pushed up inflation and Treasury yields.

Those bond yields don’t always match up with Fed rates; sometimes they run in the opposite direction. When the Fed cut rates late in 2024, Treasury yields - and mortgage rates - did not follow. Instead they rose, as investors worried about potential upcoming inflation.

Some of the recent bond yield spike was probably anticipation of the Fed raising rates.

People who already locked into a fixed-rate mortgage - which is by far the most common type of mortgage in the United States - won’t see a change at all. That mortgage rate stays the same over the 30- or 15-year lifetime of the loan, unless the borrower refinances.

Fed rate changes often have a more direct effect on shorter-term loans, or loans with variable rates, such as adjustable-rate mortgages. Those rates can move up and down as the Fed’s rate does.

Will car loans get costlier?

Car loans reflect a type of borrowing that may be partially but not directly influenced by the Fed’s rate. Banks also look at what the Fed says about what could be coming ahead to set rates.

Auto rates are affected by many factors, including bond yields, the borrower’s credit score and the number of recent delinquencies in a bank’s portfolio.

Auto loan interest rates tend to be more responsive to the Fed than mortgage rates, with shorter-term loans matching the Fed’s rate cuts more closely. But car loans are also sensitive to the market dynamics of the auto industry, so rates often stay high when many people are applying.

Lenders are still making auto loans, according to data from Cox Automotive. But rates are not going down.

“Auto loan rates tend to track the 10-year Treasury notes and longer-term market rates, and those have been moving higher lately,” Jeremy Robb, chief economist at Cox Automotive, said in a note this week. “Auto loan rates are following.”

The Fed rate hike would raise the average monthly payment by about $6, Robb wrote. But consumers may feel more strapped in other areas and be less likely to spend on a car.

What happens with credit cards and savings accounts?

Fed rate changes have a stronger influence on short-term interest rates, like those on credit cards or savings accounts. Interest rates on credit card debt may rise slightly in relation to a Fed rate cut. That could deal a blow to people who already carry a balance from one month to the next, especially with credit card debt near an all-time high.

But from a quarter-percent rate hike, the payment increase for each person should not be much, possibly a few dollars on average, said Ted Rossman, principal consumer finance analyst at Money Management International.

Still, the total increase in the past five years is noticeable.

“That starts to add up more,” Rossman said.

On the other hand, the rate hike could mean that the interest rate you’re making from holding funds in a high-yield savings account or a short-term CD also could rise, meaning your annual return might be a bit higher.

The big silver lining

The key reason for the Fed to raise rates at all is to try to slow the economy slightly and rein in persistent inflation.

Inflation has spiked this year after the U.S. and Israel attacked Iran, sending oil prices surging and making it more expensive for Americans to fill up their cars, buy groceries and purchase clothes.

The Fed’s action is designed to help tame that inflation, which could slow increases for families and ideally abate some of the rising financial pressure. Raising interest rates can slow down borrowing from both businesses and consumers, and encourage people to save more. That in turn can help cool prices by reducing demand.

“I know a rate hike may feel like bitter medicine, but we need it because we can’t just keep having this runaway price growth,” Rossman said.

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