What is the current federal interest rate for mortgages

The Federal Reserve interest rate, known as the federal funds rate, is the interest rate at which banks and credit unions borrow from and lend to each other. It's determined by the Federal Reserve and can be changed at any time. Changes to this rate impact consumers because they can influence the interest rates on credit cards, loans, and savings accounts to varying degrees.

Ultimately, the Federal Reserve interest rate is an important tool for maintaining a stable economy. Here's everything you need to know about Federal Reserve interest rates and how they impact your wallet.

What is the current federal reserve interest rate?

The current Federal Reserve interest rate, or federal funds rate, is 3.75% to 4.00% as of Nov. 2, 2022. This is the fourth consecutive rate hike of 0.75% and the sixth rate hike this year. These rate hikes are the fastest cycle in history, pushing borrowing costs to a 15-year high.

The Fed has struggled to reduce inflation. The annual inflation rate in Sept. 2022 was 8.2%, after rising 8.3% previously, according to the U.S. Labor Department. According to its recent statement, the Fed is committed to bringing inflation down to 2%. "We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%," stated Jerome Powell, the Fed Reserve Chairman.

During the pandemic, inflation hit close to 0%. Inflation quickly rose, hitting 5.4% one year ago and peaking at 9.1% in June 2022. Even with the interest rate hikes, inflation only dropped to 8.3% in August.

The Fed began raising near-zero interest rates by 0.25% in March. Since then, the Fed has raised rates by 0.50% in May, 0.75% in June, 0.75% in July, 0.75% in September, and another 0.75% in November. Rates have been raised 3.75% since the start of 2022. The last time the Fed raised interest rates by 0.75% was in 1994 and the last time it raised interest rates this much was in the early 1980s.

History of the federal reserve interest rates

The table below shows the historical Federal Reserve interest rate dating back to 2015.

Data source: The Federal Reserve.

Why does the Fed raise or lower the interest rate?

The Federal Reserve exists to promote a safe and strong economy, which includes maintaining healthy employment rates, stable prices, and reasonable interest rates. One of the primary responsibilities of the Federal Reserve is ensuring price stability. Price stability means that inflation remains low and stable over the long run. When inflation is low and stable, people can hold money without worrying about high inflation eroding purchasing power. In other words, the dollar doesn't go as far with high inflation.

The Federal Reserve lowers interest rates to stimulate the economy leading up to and during economic downturns. It raises interest rates when the economy is strong to keep businesses and consumers in check. The federal funds rate is one of the primary tools the Fed has at its disposal to do this. Adjustments in this rate aim to smooth the ups and downs of the economy, easing the severity of recessions and preventing economic booms that can lead to market crashes and excessive inflation.

Why the Federal Reserve cuts interest rates

When the Federal Reserve interest rate is low, there's more cash in circulation and banks are able to borrow from each other more freely. In turn, it becomes easier and more affordable for both consumers and businesses to borrow money, which boosts consumer spending and encourages businesses to expand, hire more workers, and increase wages.

Cutting interest rates stimulates the economy and drives economic growth, making it an appropriate tool to prevent and ease severe economic downturns. That's why you'll typically see the Federal Reserve start to lower the interest rate when economists are concerned about an oncoming downturn -- and then more aggressively in the midst of a downturn.

Due to the pandemic and in response to the sharp economic downturn, the Fed cut the federal funds rate at its meetings on March 3 and March 15, 2020. The Fed's move was to support spending by lowering the cost of borrowing for businesses and households.

Why the Federal Reserve raises interest rates

When the Federal Reserve interest rate is high, banks are discouraged from borrowing from each other, and the supply of cash in the economy decreases. This means consumers and banks are borrowing and spending less, which can cause the economy to slow down. The Federal Reserve typically raises the interest rate when the economy is strong.

It's easy to understand why the Federal Reserve would want to stimulate the economy, but it can be harder to understand why they might want to slow it down -- isn't economic growth good? Simply put, what goes up must come down, and the higher the economy climbs, the further it can fall.

When rates are low and people feel good about the economy, consumers often take on excessive debt, and lenders may even lend too much money to unqualified borrowers. This leaves people, businesses, and banks in a dangerous position when the economy inevitably slows down.

How high will interest rates go?

The Fed has been aggressively raising interest rates in an effort to fight high inflation. Inflation has hit a 40-year high, driven by strong consumer demand for both goods and services. This demand has outpaced the ability of businesses to deliver, putting upward pressure on prices.

By raising rates, the Fed is hoping to cool off demand by making it more expensive to borrow money. The goal for the Fed is to stop high inflation without potentially plunging the economy into a recession.

According to Powell, the Fed continues "to anticipate that ongoing increases will be appropriate" to reach its inflation target rate of 2%. The central bank expects to raise rates again, bringing the benchmark rate to 4.4%. This is 1 percentage point higher than what it had expected in June. Rates are expected to rise in 2023 to 4.6% and decline to 2.9% by the end of 2025. Even though the high rates may slow down the economy, Powell states that inflation is a top priority and must be dealt with aggressively. Powell has stated that they he plans to "slow the pace of increases, as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal."

How the Fed funds rate is set

The federal funds rate is set eight times per year by the Federal Reserve's Federal Open Market Committee (FOMC). In addition to these eight annual meetings, the FOMC can also call emergency meetings to immediately change the rate during times of crisis.

When the FOMC sets interest rates, they set a target rate rather than the actual interest rate, as they don't have direct control over interest rates. Once the target rate is set, the Federal Reserve engages in open market operations to hit that target. This entails buying and selling government securities such as Treasury bills, bonds, and repurchase agreements to manipulate the supply of money in the economy, which in turn influences interest rates.

When the Fed buys up government securities, they inject money into the economy. Subsequently, banks have more cash on hand, and they decrease their interest rates to attract more borrowers. On the other hand, when the Fed sells government securities, they take money out of the economy. Banks then have less cash to lend, so they increase interest rates.

When is the next Fed meeting?

The Fed's last scheduled monetary policy meeting was on Nov. 2, 2022. Now the Fed has gathered more data on inflation and the overall economy. The next tentative dates are listed below. After a December meeting, a two-day meeting is scheduled to wrap up on Feb. 1, 2023. Each meeting date is tentative until confirmed at the meeting immediately preceding it.

2022

• Dec. 13-14, 2022

2023

• Jan./Feb. 31-1
• March 21-22*
• May 2-3
• June 13-14*
• July 25-26
• Sept. 19-20*
• Oct./Nov. 31-1
• Dec. 12-13*

How other interest rates are determined

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.