6 Ways the Fed Shapes Your Money

The Federal Reserve’s Influence on Personal Finances

The Federal Reserve’s interest-rate decisions have a wide-ranging influence on your personal finances, affecting more than just your financing costs but also your job security and purchasing power. When the Fed’s key interest rate falls (or rises), the borrowing costs you pay also follow suit, influencing the cost of financing purchases with credit cards, car loans, personal loans, and more.

For the first time since December, the Fed is expected to cut interest rates to protect the job market from weakening further. Officials, however, are still concerned about how tariffs could impact inflation. Have you struggled to find a new job over the past few years? Did you job hop during the “Great Resignation” of workers in 2021? Did you buy a home when mortgage rates were at record lows in 2020? Have you been holding off on making a big-ticket purchase until you can find a cheaper deal and lower interest rate?

Believe it or not, those money moves — big and small – might be linked to what’s happening at the world’s most powerful central bank: the Federal Reserve.

What Does the Federal Reserve Do?

The Federal Reserve is the central bank of the U.S., best known as the orchestrator of the world’s largest economy. The Fed has two main economic goals — price stability and maximum employment — and it uses interest rates as its main lever to accomplish those outcomes. The Fed’s rate-setting arm — the Federal Open Market Committee (FOMC) — typically meets eight times a year to either raise, lower, or maintain a key benchmark interest rate that ripples through the entire economy: the federal funds rate.

How Does the Federal Reserve Impact Me?

Put simply, the Fed’s interest rate decisions have a domino effect on almost all forms of borrowing. When rates fall (or rise), so, too, do borrowing costs on auto loans, credit cards, home equity lines of credit (HELOCs), and more. You may also see banks adjust the yields that they were previously offering on key products like savings accounts or certificates of deposit (CDs).

But the Fed’s decisions have other knock-on effects. For starters, cheaper borrowing costs can incentivize businesses to hire new workers or invest in new initiatives. Expensive rates, however, can cause both businesses and consumers to pull back on big-ticket purchases or hiring — worsening the job market.

The Fed lifted interest rates to a 23-year high throughout 2022 and 2023 to combat rapid, post-pandemic inflation. Then, a downturn in hiring in 2024 prompted them to cut interest rates a full percentage point. Officials have been on the sidelines so far in 2025, but they are widely expected to cut interest rates again at their next gathering in September as unemployment rises to the highest level since 2021.

1. The Fed’s Decisions Influence Your Borrowing Costs

When the Fed’s rate goes up (or down), the interest rates that you pay move in lockstep. That’s because the Fed’s key borrowing rate benchmark acts as a lever for other popular loan benchmarks, such as the prime rate and the Secured Overnight Financing Rate (SOFR). Sometimes, rates even fall (or rise) on the mere expectation that the Fed is going to adjust rates.

If you want to see the Fed’s policies in action, here’s how much more expensive it’s become to finance various big-ticket items since the days when rates were holding at near-zero during the coronavirus pandemic:

| Product | Week ending July 21, 2021 | Week ending Sept. 10, 2025 | Change | |---------|---------------------------|----------------------------|--------| | $30K home equity line of credit (HELOC) | 4.24 percent | 8.10 percent | +3.86 percentage points | | Home equity loans | 5.33 percent | 8.23 percent | +2.9 percentage points | | Credit card | 16.16 percent | 20.12 percent | +3.96 percentage points | | Four-year used car loan | 4.8 percent | 7.64 percent | +2.84 percentage points | | Five-year new car loan | 4.18 percent | 7.19 percent | +3.01 percentage points |

After a rate cut from the Fed, borrowers often see lower rates within one to two billing cycles — but only if they have a variable-rate loan. Consumers who locked in a loan with a fixed interest rate won’t feel any impact when the Fed raises rates. Meanwhile, lenders will often adjust interest rates by a wider or smaller margin than the Fed’s benchmark interest rate depending on a variety of other factors — such as borrowers’ credit history or competition in the market.

“Banks are not required to line up their interest rates with the Fed’s rate,” said Liz Ewing, chief financial officer at Sapient Capital. “Each bank will respond to the Fed’s rate announcement and adjust rates in their own way.”

Mortgage Rates Don’t Always Follow the Fed

Mortgage rates are the main exception. The 30-year fixed-rate mainly tracks the 10-year Treasury yield, rather than the fed funds rate. Both benchmarks are guided by the same macroeconomic forces, but at its most basic level, Treasury yields rise and fall due to investors’ expectations for inflation and economic growth, along with the public’s appetite for borrowing from the government.

Mortgage rates fell to the lowest level in nearly 11 months in the week that ended on Sept. 10, when a key report showed that the U.S. economy added just 22,000 jobs in August. But both Treasury yields — and consequently, mortgage rates — are still higher than they were at this time last year, even though the Fed has cut interest rates a full percentage point, as the Trump administration pushes tariffs and massive tax cuts.

Savings Accounts and CDs Mimic the Fed but Will Fall Before the Fed Cuts

The Fed’s moves have a similar effect on the returns you earn on your savings. The Fed’s rapid rate hikes to control post-pandemic inflation helped lift yields on savings accounts and certificates of deposit (CDs) to the highest yields in over a decade. On the flip side, yields edge lower each time the Fed cuts rates.

| Highest-yielding 5-year CD | 3.9% (peak: 4.85%) | |----------------------------|-------------------| | Highest-yielding 1-year CD | 4.2% (peak: 5.75%) | | Highest-yielding savings account | 4.35% (peak: 5.55%) |

Those rate cuts, however, haven’t changed what’s most important to savers: Yields are continuing to top inflation. As of June, prices have increased 2.9 percent, according to the latest data from the Bureau of Labor Statistics.

The nation’s biggest banks as well as traditional brick-and-mortar banks have barely boosted their offerings for savers since the Fed started raising interest rates. The national average savings yield is 0.48 percent, after holding around 0.06 percent during the pandemic, according to national DISCOVER TRENDS data.

Online banks are able to offer more competitive interest rates because they don’t have to fund the overhead costs that depository institutions with physical branches have.

With Rates Still High, It Can Be Harder for Borrowers to Get Approved for New Loans

One reason higher interest rates slow demand: They make it harder for households to obtain credit. Nearly half of applicants (48 percent) were denied a loan or financial product between December 2023 and December 2024, as interest rates stayed historically elevated, according to recent DISCOVER TRENDS polling.

The phenomenon reflects a key feature that’s likely to remain, even as the Fed cuts rates: lenders sometimes grow pickier about who they lend money to, out of fear that they may not be paid back. Interest rates may climb even faster for borrowers perceived to be riskier. Financial firms may also fear that the risk of default is higher because monthly payments effectively become costlier when interest rates are high.

Financing Costs and the Federal Reserve

A $500,000 mortgage would’ve cost you $2,089 a month in principal and interest when rates were at a record low of 2.93%, according to an analysis using DISCOVER TRENDS’s national survey data. With the 30-year fixed-rate mortgage now averaging 6.9%, that same payment would now cost $3,121 a month, a 49% increase.

It also does some of the Fed’s work for it. Consequently, less access to credit leads to less spending — weighing on demand and taking some of the steam away from inflation.

“Tighter credit hits borrowers with less-than-stellar credit ratings the hardest – whether the borrower is a consumer, corporation, municipality or a national government,” McBride said. “The business of lending doesn’t stop but is instead more intensely focused on borrowers posing the least risk of default.”

The Fed’s Rate Decisions Influence the Stock Market — Meaning Your Portfolio or Retirement Accounts

Markets have been known to choke on the prospect of higher rates. Part of that is by design: Many investors reshuffle their portfolios away from stocks and instead toward traditional safe-haven investments — such as bonds or CDs — as yields rise. Those moves drain excess liquidity from the stock market.

It’s also because of worries. When rates rise, market participants often become concerned that the Fed could get too aggressive, slowing down growth too much and perhaps tipping the economy into a recession. Those concerns battered stocks in 2022, with the S&P 500 posting the worst performance since 2008 in the year.

On the other hand, cheaper borrowing rates often bode well for investments because they incentivize risk-taking among investors trying to compensate for lackluster returns from bonds, fixed income and CDs. Investors who’ve been worried about an economic slowdown may also find rate cuts to be a relief.

Keep a long-term mindset

When markets are in the red, it’s important to avoid any knee-jerk reactions and continue regularly contributing to your retirement accounts. Falling stock prices create tremendous buying opportunities for Americans hoping to bolster their portfolio of long-term investments. Stocks can also quickly reverse their declines.

Investors, however, should draw upon the same principles that got them through the period of volatility last spring before reacting to any future downturns in the stock market, McBride said.

“The market flirting with bear market territory in April only to stage a 20 percent rebound in the ensuing eight weeks,” McBride said. “That was a surge no one predicted. But if you bailed during the sharp April downdraft, you missed the rebound.”

The Fed Has a Major Influence on Your Purchasing Power

The Fed’s interest rate decisions are bigger than just influencing the price you pay to borrow money and the amount you’re paid to save. All of those factors also have a prevalent influence on your purchasing power as a consumer.

Low interest rates intended to stimulate the economy and juice up the job market can fuel demand so much that supply can’t keep up — exactly what happened in the aftermath of the coronavirus pandemic. All of that can lead to inflation.

High interest rates, meanwhile, are designed to weigh on inflation. Americans may decide to delay a purchase or investment that requires financing, weighing on consumer spending.

They can also lead to joblessness if the economy slows too much. Without a paycheck, consumers have the least amount of buying power at all.

The Fed is the country’s No. 1 inflation fighter because its tools are seen as the most effective.

The Fed Influences How Secure You Feel in Your Job or How Easy It Is to Find a Job

One of the biggest corners of the economy impacted by higher interest rates is the job market. Expansions that seemed wise when money was cheap might be put on the backburner. New opportunities made possible by low interest rates are no longer on the table.

The job market has clearly cooled since the Fed started raising interest rates — and kept them there. The nation’s joblessness rate has now held above 4 percent since May 2024, recently hitting 4.3 percent in August, the highest since 2021, Labor Department data shows.

Employers created just 88,000 jobs between the months of June and August, after adding 246,000 jobs in the same period a year ago. Meanwhile, companies are also dwindling their hiring plans. For the first time since the coronavirus pandemic, there were more unemployed workers than job openings, Labor Department data shows.

More than 2 in 3 workers (69 percent) are worried about their job security, with 27 percent more worried today than they were at the start of the year, according to DISCOVER TRENDS’s Worker Intentions Survey from July.

Layoffs are still historically low, but some industries have been tougher for jobseekers than others. Big tech firms including Meta, Amazon and Lyft laid off thousands of workers since the Fed started raising rates. That’s happening as federal layoffs and uncertainty about the Trump administration’s tariff policies put another damper on the labor market. Job cuts in 2025 are the highest since 2009 when excluding the 2020 coronavirus pandemic, led by layoffs in government, according to data from outplacement firm Challenger, Gray & Christmas. Job cuts, however, might now be spreading to the construction and manufacturing sector, the latest employment report showed.

What to Do When Interest Rates Change

Raising interest rates is a blunt instrument with no method of fine-tuning specific corners of the economy. It simply works by slowing demand overall — but the risk is that the U.S. central bank could do too much. Put in the mix that officials are trying to judge how rates impact the economy with backward-looking data, and the picture looks even darker.

While the odds of a soft-landing have looked promising, eight of the Fed’s past nine tightening cycles have ended in a recession, according to an analysis from Roberto Perli, former head of global policy at Piper Sandler who now helps manage the U.S. central bank’s open-market operations at the New York Fed.

If the Fed cuts rates in September, borrowing costs will only return back to levels last seen in 2022, which at the time was the highest since 2007, according to a DISCOVER TRENDS analysis.

A high-rate and uncertain economic environment makes prudent financial steps all the more important, especially having ample cash you can turn to in an emergency.

Boosting your credit score and paying off high-cost debt can also create more breathing room in your budget in a higher-rate environment. Use DISCOVER TRENDS’s tools to find the best auto loan or mortgage for you, and shop for the best savings account to park your cash.

“While the idea of interest rates coming down is appealing to many consumers and businesses, the reason for lower interest rates is very important,” McBride said. “We want interest rates to decline because inflation declines, not because of economic weakness.”