What the Federal Reserve’s federal funds target rate hike means for consumers

By Rebekah Hall
U of A System Division of Agriculture

July 26, 2023

Fast Facts:

Federal Reserve raised federal funds target rate by 0.25 percent on July 26
Rates increased to highest level since 2001 at 5.25 to 5.5 percent
Increase affects other rates that impact what consumers earn or pay in interest
Rate hikes also mean higher interest earned on savings

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LITTLE ROCK — The Federal Reserve federal funds target rate hike on Wednesday will affect interest rates for consumers, making it an expensive time to borrow or make large purchases.

TIPS FOR CONSUMERS — Laura Hendrix, interim associate department head of Family and Consumer Sciences for the Division of Agriculture, said the Federal Reserve's hike of the federal funds target rate will mean higher costs for borrowing money to make big purchases, such as a house or a car. (Division of Agriculture photo.)

The Fed raised the federal funds target rate by 0.25 percent to a range of 5.25 to 5.5 percent, its highest level since 2001. The federal funds target rate is the rate financial institutions pay each other when borrowing money overnight.

Laura Hendrix, interim associate department head of Family and Consumer Sciences for the University of Arkansas System Division of Agriculture, said the Fed functions to promote effective operation of the U.S. economy. The Fed may raise or lower the federal funds target rate to help maintain a stable economy.

“The Fed may raise interest rates to slow economic activity,” Hendrix said. “When rates are higher, it is more expensive to borrow, so consumers and businesses are less likely to make large purchases. A rate hike usually means higher interest paid to borrow money and higher interest earned on savings. Consumers who are in the market for a house or a car will see higher costs for borrowing money.”

Hendrix said that regardless of the current interest rate, it’s important to shop around for a loan.

Look for the best terms and rates. “Consumers who have higher credit scores qualify for better interest rates,” Hendrix said. “Look for ways to improve your credit score and clean up your credit report.”
Consider the type of loan. Hendrix said fixed-rate loans for shorter periods of time usually have the lowest interest rates. “Consumers may see a slight increase in interest earned on savings accounts and Certificates of Deposit, so now may be a good time to take advantage of those,” she said.
Pay additional funds to the principal of a loan. This is another way to save money on interest. Hendrix said keeping credit card balances low in comparison to spending limits also helps to avoid additional interest and helps to increase one’s credit score.

The Fed’s increase of the federal funds target rate could impact consumers’ budgets, but Hendrix said this depends on an individual’s situation and financial goals.

“One benefit of careful planning and financial management is that it prepares consumers to make the most of economic upswings and to weather the downturns,” Hendrix said. “Consumers who were already overextended will be more stressed by increases in consumer goods. One option is to look for ways to save on everyday expenses, such as groceries.”

For more information about saving money on groceries, check out these Cooperative Extension Service fact sheets:

To learn more about financial management, visit the Cooperative Extension Service’s Personal Finance page.

To learn about extension programs in Arkansas, contact your local Cooperative Extension Service agent or visit www.uaex.uada.edu. Follow us on Twitter and Instagram at @AR_Extension. To learn more about Division of Agriculture research, visit the Arkansas Agricultural Experiment Station website: https://aaes.uada.edu. Follow on Twitter at @ArkAgResearch. To learn more about the Division of Agriculture, visit https://uada.edu/. Follow us on Twitter at @AgInArk.

About the Division of Agriculture

The University of Arkansas System Division of Agriculture’s mission is to strengthen agriculture, communities, and families by connecting trusted research to the adoption of best practices. Through the Agricultural Experiment Station and the Cooperative Extension Service, the Division of Agriculture conducts research and extension work within the nation’s historic land grant education system.

The Division of Agriculture is one of 20 entities within the University of Arkansas System. It has offices in all 75 counties in Arkansas and faculty on five system campuses.

The University of Arkansas System Division of Agriculture offers all its Extension and Research programs to all eligible persons without regard to race, color, sex, gender identity, sexual orientation, national origin, religion, age, disability, marital or veteran status, genetic information, or any other legally protected status, and is an Affirmative Action/Equal Opportunity Employer.

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Media Contact:
Rebekah Hall
rkhall@uada.edu
@RKHall_
501-671-2061