What is the interest rate the Federal Reserve banks charge for loans to banks?

Credit cards and savings accounts are most sensitive to changes in the federal funds rate, followed by personal loans and auto loans, and finally, mortgage loans. The interest rates on all of these products are determined by other important factors, such as creditworthiness.

As the Federal Reserve interest rate is a short-term rate, changes in it have a stronger impact on short-term lending products. They also tend to have a bigger impact on products with variable, rather than fixed, interest rates.

Here's how banks set the interest rates on credit cards, loans, and savings accounts and how changes in the federal funds rate might affect you.

Credit card interest rates

Most credit cards have a variable interest rate, so a change in the Fed's benchmark will directly impact a credit card's annual percentage rate (APR). This is directly tied to the prime rate, which is the interest rate for customers with prime credit, and it's pegged at 3% above the upper limit of the federal funds rate.

What's more, since credit cards are the most short-term borrowing method, the rates will change almost immediately in response to federal funds rate changes. However, because interest rates on credit cards are relatively high, these changes -- for example, your APR going from 17.25% to 17.50% -- are often unnoticeable.

The average credit card interest rate is now 18.94%, the highest in history. The average subprime credit card APR is at 27.84%. With the recent interest rate hikes, the interest rate on credit cards have hit an all-time high, beating the peak of 17.8% set in July 2019. The average credit card APR was at 16.17% in early March, before the Fed began its rate increases.

Personal loan interest rates

The interest rates on personal loans aren't directly tied to the prime rate or the federal funds rate, but they can be influenced by it. Changes in the federal funds rate can eventually lead to changes to personal loan rates, but those rate changes may not be as immediate as they are with credit cards.

In addition, many personal loans have fixed interest rates, meaning if you already have a personal loan, the rate will remain the same for the life of the loan -- regardless of how the federal funds rate changes. Loans with variable interest rates can fluctuate as the federal funds rate changes.

The average interest rate for a 24-month personal loan has increased from 8.73% in May to 10.16% in Aug. 2022, the latest numbers available from the Fed.

Auto loan interest rates

Like personal loans, auto loan interest rates aren't directly tied to the federal funds rate. However, they can be influenced by it, particularly because they're somewhat short term -- typically two to five years. The changes in auto loan rates are likely to be minimal though, as they're largely based on other factors like your credit score and the bond market.

Recent rate hikes will not affect current auto loans, but new car loans or those with variable-rate financing will likely see costs rise. The average auto loan rate has dramatically increased to 8.98% for those with excellent credit. Average auto loan rates for bad credit, or subprime borrowers, are at 20.45%

Mortgage loan interest rates

Mortgage loans are typically long-term loans, so short-term interest rate changes aren't likely to affect them as much. Mortgage rates aren't directly tied to the federal funds rate -- they're set based on a variety of economic indicators, which can include the federal funds rate, but also include factors such as unemployment, inflation, and the bond market.

The current 30-year fixed mortgage rate is 6.95%, briefing hitting over 7% this past month. This is more than double the average mortgage rate of 3.22% from early this year. While those with an existing mortgage will not be affected by the recent rate hike, those with an adjustable-rate mortgage (ARM) will likely see their costs rise. The average interest rate for a five-year ARM and 15-year mortgage have also doubled since the beginning of the year, hitting 6.95% and 6.29% respectively.

Savings account interest rates

Interest rates on savings accounts are fairly responsive to changes in the federal funds rate. When interest rates are cut, banks are likely to cut the APYs offered by their savings accounts fairly quickly to protect their profits. Increases in the federal funds rate usually lead to less dramatic and immediate increases in savings account rates, but a rising rate environment is still advantageous for savers.

The current average APY for savings accounts is now at 0.21%, almost four times the APY of 0.06% from earlier this year. CD rates have also gone up since the Fed's rate hikes.

The Federal Reserve interest rate is an important tool for guiding the economy. Increases in the federal funds rate can protect a strong economy, while cuts to the federal funds rate can help cushion the fall for a declining economy. These changes can impact your wallet -- low interest rates are good for borrowers, while high interest rates are good for savers. Ultimately, though, it's your own money habits that are the main factor in determining your financial future.

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