How it impacts your money

The Federal Reserve left its target federal funds rate unchanged for the second consecutive time Wednesday.

Even so, consumers likely will get no relief from current sky-high borrowing costs.

Altogether, Fed officials have raised rates 11 times in a year and a half, pushing the key interest rate to a target range of 5.25% to 5.5%, the highest level in more than 22 years. 

“Relief for households isn’t likely to come soon, at least not directly in the form of a cut in the fed funds rate,” said Brett House, economics professor at Columbia Business School.

The consensus among economists and central bankers is that interest rates will stay higher for longer, or until inflation moves closer to the central bank’s 2% target rate.

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 consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

To a certain extent, many households have been shielded from the brunt of the Fed’s rate hikes so far, House said. “They locked in fixed-rate mortgages and auto financing before the hiking cycle began, in some cases at record-low rates during the pandemic.”

However, higher rates have a significant impact on anyone tapping a new loan for big-ticket items like a home or a car, he added, and especially for credit card holders who carry a balance.

Here’s a breakdown of how it works.

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rose, the prime rate did as well, and credit card rates followed suit.

Credit card annual percentage rates are now more than 20%, on average — an all-time high. Further, with most people feeling strained by higher prices, more cardholders carry debt from month to month.

“Rising debt is a problem,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics.

“Consumers are using a lot of credit card debt and paying very high interest rates,” Sohn added. “That doesn’t bode well for the long-term economic outlook.”

For those borrowers, “interest rates staying higher for a longer period underscores the urgency to pay down and pay off costly credit card debt,” noted Greg McBride, chief financial analyst at Bankrate.com.

Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.

The average rate for a 30-year, fixed-rate mortgage is up to 8%, the highest in 23 years, according to Bankrate.

“Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and…