The Fed holds rates near zero. Here’s what that means for you

Even though the Federal Reserve didn’t raise its benchmark rate Wednesday, the days of low rates are clearly numbered.

Reports of hotter-than-anticipated inflation have paved the way for the central bank to unwind last year’s bond buying. While the Fed said that interest rates will stay near zero for now, the tapering of bond purchases is seen as the first step on the way to interest-rate hikes.

That will inevitably impact the rates consumers pay.

In fact, rates are already rising for long-term borrowing costs, said Yiming Ma, an assistant finance professor at Columbia University Business School. “Likely that’s going to continue as the implementation starts actually happening.”

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The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate that consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

Since the start of the pandemic, the Fed’s historically low borrowing rates have made it easier to access cheaper loans and less desirable to hoard cash.

Once the central bank starts to reel in its easy money policies, consumers may need to work a little harder to protect their buying power.  

Here’s a breakdown of how it works.

For starters, when the Fed starts to slow the pace of bond purchases, long-term fixed mortgage rates will edge higher, since they are influenced by the economy and inflation.

The average 30-year fixed-rate home mortgage has already risen to 3.24%, according to Bankrate.

“If they haven’t already, now could still be a good time for some borrowers to consider refinancing,” said Jacob Channel, senior economic analyst at LendingTree. “Even though rates are rising, they’re still relatively low from a historical perspective.

“Nonetheless, the window for refinancers to get a sub-3% rate is rapidly closing.”

Currently, refinance borrowers with a good credit score can expect to see APRs around 2.85% for a 30-year, fixed-rate refinance loan, and 2.31% for a 15-year, fixed-rate loan, according to a Lending Tree.

Once the federal funds rate does rise, the prime rate will, as well, and homeowners with adjustable-rate mortgages or home equity lines of credit, which are pegged to the prime rate, could also be impacted.

But it isn’t all bad news, Channel added. “Higher rates could help dampen demand for homes somewhat, which could result in less dramatic home price growth, homes staying on the market for longer, and fewer bidding wars,” he said.

“This could actually make it easier for some homebuyers — like first-time buyers — to enter into the housing market.”

And it may still be a while before rates for home equity lines of credit, which stand at 3.87%, move up from the current “very low, very…