US & World Economies US Economy Monetary Policy When Will Interest Rates Go Up? Raising interest rates can help tame inflation By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on September 21, 2022 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. learn about our financial review board Fact checked by David Rubin Fact checked by David Rubin Facebook Instagram Twitter David J. Rubin is a fact checker for The Balance with more than 30 years in editing and publishing. The majority of his experience lies within the legal and financial spaces. At legal publisher Matthew Bender & Co./LexisNexis, he was a manager of R&D, programmer analyst, and senior copy editor. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article History of the Fed Funds Target Range How High Can Rates Go? Short-Term Rates Long-Term Rates Frequently Asked Questions (FAQs) Photo: Eva-Katalin / Getty Images Rising interest rates increase the cost of credit cards, loans, and mortgages. They also raise the interest you can earn on savings accounts and certificates of deposit (CDs). On September 21, the Federal Reserve Open Markets Committee (FOMC) raised rates 0.75 percentage points again, making the target range for the federal funds rate 3% to 3.25%. The FOMC is still hoping to wrangle growing inflation while avoiding a recession and you can expect likely two more hikes before the end of the year if inflation doesn't slow. This plan won't impact savings accounts, mortgages, CDs, and credit cards all in the same way. Each product relies on a different benchmark. Increases for each depend on how their interest rates are determined. Here's what you need to know about interest rates, when the Fed will raise them, and how your finances will be affected. Key Takeaways The two most important determinants of consumer interest rates are the fed funds rate for short-term loans and the 10-year Treasury yield for long-term loans. The Federal Open Market Committee (FOMC) began raising interest rates in March 2022, and they expect to continue increasing rates throughout the year. The benchmark fed funds rate has historically had a sweet spot of 2% to 5%. All short-term interest rates follow the fed funds rate. Long-term rates follow the 10-year Treasury yield. History of the Fed Funds Target Range The fed funds rate target range was 1.25% to 0.50% as of March 16, 2022. The FOMC had lowered it to 0% to 0.25% on March 15, 2020, to support the economy during the COVID-19 pandemic. The last time it lowered the rate to this level was in December 2008. It stayed there until December 2015. The 10-year Treasury yield fell to a record low of 0.52% on Aug. 4, 2020. The previous record was 0.54%, set on March 9, 2020. Investors were panicked because of the COVID-19 pandemic. The rate was 2.38% as of April 4, 2022. Demand for ultra-safe Treasuries is likely to remain high during the pandemic. Note The Fed also influences Treasury yields. The central bank purchases Treasuries through its quantitative easing (QE) program to keep the yield low. The FOMC expanded QE purchases to an unlimited amount on March 23, 2020. Its balance sheet grew to more than $7 trillion by the end of May 2020 as a result. Demand for Treasuries should fall when the economy improves. The yields rise as sellers try to make the bonds more attractive. Higher Treasury yields drive up interest rates on long-term loans, mortgages, and bonds. How High Can Rates Go? The Fed didn't plan on raising the fed funds rate until the economy improved and inflation reached an average of 2%. Historically, the benchmark rate has had a sweet spot of 2% to 5%. The highest it's ever been was 19% to 20% in 1980 and 1981. The Fed raised it to combat an inflation rate of 13.5%. It also raised it to battle stagflation, the unusual circumstance caused by wage-price controls, stop-go monetary policy, and taking the dollar off of the gold standard. The yield on the 10-year Treasury note also hit a record high in 1981. It was 15.84% on September 30, 1981. Note Long-term rates could rise at any time because they're bought and sold on the secondary market. But it's unlikely that they'll rise because the Fed is buying enough through QE to keep rates low. Short-Term Rates All short-term interest rates follow the fed funds rate. The fed funds rate is the interest rate that banks charge each other for overnight loans. Banks set short-term rates themselves, but they rarely vary from the Fed's target rate. Banks know that the Fed can use open market operations to pressure them to meet their target rate. Short-term rates affect the interest rates on savings accounts, CDs, credit cards, and adjustable-rate loans. Savings Accounts and CDs Interest rates for savings accounts and certificates of deposit track the London Interbank Offered Rate (LIBOR). That's the interest rate at which major international banks are willing to offer eurodollar deposits to one another. The LIBOR rate rarely diverges from the fed funds rate. Banks may pay you a little less than LIBOR so they can make a profit. Savings accounts may follow the one-month LIBOR rate, while CDs may follow longer-term rates. Note LIBOR's status as the relevant price index for consumer products is due to be phased out in stages beginning in 2022, with a full phaseout by June 2023. Credit Card Rates Banks base credit card rates on the prime rate, which is what they charge their best customers for short-term loans. It's typically three percentage points higher than the fed funds rate. According to our own study, the average credit card APR has hovered around 20% from April 2020 through February 2022, depending on your credit score and the type of card. It's always a good idea to pay off any outstanding credit card balances due to the high rates. Home Equity Lines of Credit and Adjustable-Rate Loans The fed funds rate guides adjustable-rate loans. These include home equity lines of credit and mortgages. The cost of these loans rises as the fed fund rate rises, so pay them down as much as possible to avoid any surprises. Note Talk to your bank about switching to a fixed-rate loan to protect yourself from future rate increases. Long-Term Rates Long-term rates follow the 10-year Treasury yield. The U.S. Treasury sells Treasury bills, notes, and bonds at an auction for a fixed interest rate that loosely tracks the fed funds rate. Investors can then sell them on the secondary market. Many factors influence bond yields, including the demand for the dollar from forex traders. When demand for the dollar rises, so does the demand for Treasuries. Investors will pay more to buy them. Since the interest rate doesn't change, the overall yield falls. Demand for Treasuries also increases when there are global economic crises. That's because the U.S. government guarantees repayment. All these factors mean that interest rates on long-term debt aren't as easy to predict as those based on the fed funds rate. Auto and Short-Term Loans Fixed interest rates on three- to five-year loans don't follow the prime rate, LIBOR, or the fed funds rate. They're a few percentage points higher than one-, three-, and five-year Treasury bill yields. Yields are the total return that investors receive for holding the bills. Note When rates do rise again, you may want to consider keeping your fixed-rate loans. Rising interest rates won't affect them. Mortgage Rates and Student Loans Banks set fixed rates on conventional mortgages a little higher than the yields on 30-year Treasury bonds. Interest rates on long-term loans rise along with those yields. The same holds true for student loans. Mortgage interest rates closely follow Treasury note yields. State, Municipal, and Corporate Bonds State, municipal, and corporate bonds compete with U.S. Treasuries for investors' dollars. They're riskier than U.S. government bonds, so they must pay higher interest rates than Treasuries. Fitch, Moody's Investors Service, and Standard & Poor's are the main agencies that rate the risk of default. Bonds with the most risk are called "high-yield" or "junk" bonds, and pay the most return. When Treasury yields rise, so do the yields of these bonds to remain competitive. Frequently Asked Questions (FAQs) What happens to bond prices when interest rates rise? Market interest rates and bond prices will often move in opposite directions. As interest rates rise, bond prices fall. This makes bonds popular investments at times when interest rates are high. Will house prices fall when interest rates rise? Interest rates don't directly impact house prices, but rising interest rates can slow demand in the housing market. Fewer people may be interested in buying when interest rates go up because higher interest increases the cost of a mortgage. Housing prices may level off or fall in areas with lower demand. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement." Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement, March 16, 2022." Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement: March 15, 2020." Board of Governors of the Federal Reserve System. "Open Market Operations." FRED. "Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity." Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement, March 23, 2020." 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