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What is the federal funds rate?

The federal funds rate is the interest rate that banks charge one another for borrowing money. The rate then affects consumers because it will also impact the interest rates they pay on loans. This includes car loans, HELOCs and other debt like credit card rates.

Central bank officials announced on November 1st, they will continue to hold rates steady this month, keeping the target range at 5% to 5.25%.

Today’s rates are a big departure from just two years ago. Back in March 2020, the federal funds rate sat at near zero, and in June 2021 policymakers predicted there would be no rate hikes in 2022.

However, the rate has now increased 11 times since then in an effort to combat inflation.

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Who determines the federal funds rate?

The federal funds rate is dictated by Federal Reserve officials, specifically a 12-person committee — called the Federal Open Market Committee (FOMC) — that includes the chair of the Reserve, Jerome H. Powell. The FOMC meets eight times a year to discuss the rate, using indicators such as inflation to determine whether a hike is necessary.

The Fed interest rate hike, or funds rate hike, is meant to limit consumer demand. When the rate increases it indirectly affects the interest that consumers pay for loans, such as those used to buy a car or buy a house.

Inflation was at 3.7% as of November 2023.

How the federal funds rate impacts borrowing


The federal funds rate helps dictate the prime rate and variable mortgage rates, though not the rates on fixed home loans. Even so, new fixed-rate loans have been getting more and more expensive.

During the earlier stages of the pandemic, the Fed kept fixed mortgage rates in check by buying billions worth of Treasury bonds and mortgage-backed securities every month. Those purchases helped "foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses," the central bank said.

But in May 2022, the Fed announced plans to begin selling off some of those assets.

The federal funds rate more directly affects other forms of borrowing, such as credit cards and car loans.

Credit cards

The interest rate hike also affects the interest you pay for credit card loans. The annual percentage rate (APR) determines how much you pay for any debt that is outstanding at the end of the month. The average APR has increased from 16% prior to 2022's first hike to 27.81% as of November 1, 2023.

What does this mean for your credit card payments? Someone with a $15,000 credit card balance will now pay over $700 more in interest (compared to an APR of 16%).

Car loans

In the last quarter of 2022, the national average rate for a 60-month new car loan was 4.03% but that has increased with each rate hike. The average rate sits at 7.49% as of September 2023.

However, keep in mind that factors such as credit score and your vehicle will affect your given rate.


Home equity lines of credit (HELOCs) are also tied to the federal funds rate, although there is a less direct link. The interest rate for a HELOC is determined by the prime rate, which is usually 3% higher than the federal funds rate. Since HELOC lenders tie their rates to the prime rate, users with a variable rate HELOC will see their interest payments go up or down based on the federal funds rate.

When the federal funds rate increases, HELOC interest typically increases by the same amount. For a 10-year $30,000 HELOC, the average rate is 8.75% as of September 2023.

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What to do when interest rates go higher

If a mountain of nagging, high-interest debt has you worried, you could roll those debts into a single, lower-interest debt consolidation loan. You’ll pay less in interest, and potentially eliminate your debt sooner and free up some cash flow.

If you're planning to buy a home anytime soon, it's probably time to lock in a mortgage rate, as both adjustable and fixed rate mortgages are getting more expensive with each rate hike. The bigger the purchase, the more your interest rate matters.

Whatever type of home loan you’re shopping for, be sure to compare offers from at least five lenders. Evaluating multiple offers is a proven strategy for finding the best mortgage for your budget.

Before applying for a loan, take a quick, free peek at your credit score. Borrowers with the highest credit scores are typically offered the lowest rates, so you may need to work on improving your score before you approach lenders.

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About the Author

Cadeem Lalor

Cadeem Lalor

Associate Editor

Cadeem Lalor is an associate editor with Moneywise. He has previously served as an editor with The Hamilton Spectator and The Toronto Star.

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The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.