The interest you pay to borrow and the interest
you earn on your bank deposits are direct consequences of Fed
decisions about the money supply.
That’s because banks typically increase
or decrease the interest rates on their loans within hours of
a Fed decision to change rates. That immediately makes it cheaper
or more expensive to finance new expenses. Banks may also adjust
the interest they pay on checking and savings accounts and certificates
of deposit (CDs), though an increase in rates may occur more slowly
than a decline.
Crediting the Fed
Similarly, the Fed’s actions may affect
credit card rates. If the Fed cuts interest rates significantly,
and the
prime rate
falls as well, credit card
companies may begin to charge a smaller
annual percentage rate
(APR)
on their customers’ variable rate accounts. If you
have credit card debt, lower interest rates can help ease your
burden slightly.
But, if the Fed raises rates, credit card companies may increase the rates they charge. Higher interest rates mean you pay more for credit.
The catch is that interest on fixed-rate
credit cards tends to stay the same, even when other rates drop,
though it goes up when rates increase.
