The term federal funds rate refers to the target interest rate set by the Federal Open Market Committee (FOMC). FOMC is the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy specifically by directing open market operations (OMOs). The target is the rate at which the Fed suggests commercial banks borrow and lend their excess reserves to each other overnight.

After raising the target in March 2022, the Federal Reserve again raised the target for the fed funds rate by half a point to 0.75%-1% during its May 2022 meeting. This second consecutive rate hike was the biggest rise in borrowing costs since 2000, and supposedly was aimed to tackle soaring inflation.

What impact will this rate hike have on the consumers? While that rate mostly affects banks, it will have some impact on consumers. The federal funds rate will affect banks’ prime rate, the interest rate they charge their best customers. A higher prime rate will affect auto loans, personal loans, and interest rates on credit cards, all of which are already extremely high.

A higher target means borrowing money for homeowners just got more expensive. Long term fixed mortgage rates have been creeping higher, as they are affected by the economy and inflation. According to Jacob Channel, senior economic analyst at Lending Tree, the average fixed rate mortgage is well above 4% and is likely to keep rising. Homeowners with adjustable-rate mortgages or home equity lines of credit, which are linked to the prime rate, will be more directly affected. In a nutshell, the higher rates go, the harder it will be to borrow. 

Credit card rates will also head higher. Since most credit cards have a variable rate, there is a direct connection to the Fed’s benchmark. Matt Schultz, chief credit analyst for Lending Tree, stated, “A single quarter-point rate increase isn’t likely to flip cardholders’ financial world upside down. However, all rate hikes, even small ones, are unwelcome news for folks with credit card debt.”

The interest rate hike will also affect consumers who invest in the stock market. The soaring inflation does not bode well for stock investors. The combination of higher interest rates and higher inflation is usually bad for stocks since it reduces growth and, in many cases, companies’ profits.

One silver lining for consumers in raising the target might be found in their savings accounts (if they have any). The national average interest rate for savings accounts is a mere 0.06%, according to Bankrate’s May 11 weekly survey of institutions. Consumers will hopefully see a boost in their savings rate as a result of the rise in the target rate. 

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