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What the Fed’s Rate Hike Means for Retirees
The central bank’s latest rate increase could affect everything from your savings account to your monthly expenses
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Key takeaways
- The Federal Reserve raised its benchmark rate by a quarter percentage point to a target range of 3.75 to 4 percent, its first increase in three years.
- Higher rates could boost returns on savings accounts, money market funds and short-term CDs.
- Borrowing costs are expected to rise for products such as credit cards and home equity lines of credit, while mortgage rates should see little direct impact.
The Federal Reserve has raised its benchmark rate for the first time since July 2023. The central bank’s Federal Open Market Committee had been holding the federal funds rate steady since the start of the year but decided at its Sept. 16 meeting to increase it by a quarter percentage point, to a target range of 3.75 to 4 percent.
The federal funds rate is the interest rate that financial institutions charge each other when they lend reserves overnight, which affects other interest rates. By raising the cost of borrowing, the Fed aims to slow consumer demand for goods and services, which can drive down prices.
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A rate hike is one tool that the Fed can use to fight inflation, which has been “stubbornly above the Federal Reserve’s target of 2 percent,” says Christian Weller, a professor of public policy at the University of Massachusetts Boston. Inflation data released Sept. 11 showed that consumer prices were up 3.4 percent year over year in August.
“At a glance, rate hikes don’t sound great for consumers,” says Ted Rossman, principal consumer finance analyst at Money Management International, a nonprofit credit counseling agency. “Borrowing is already expensive enough.”
But higher interest rates aren’t necessarily bad news all around.
“Like everything, there will be winners and losers,” says Laura Quinby, associate director of labor markets and household finance at the Center for Retirement Research at Boston College. “It really depends on how a household is invested and what sources of income they have in retirement.”
Here’s what to know about how the Fed’s rate hike will affect retirees.
What it means for savers
“One silver lining is that higher rates are going to benefit savers,” Rossman says. That’s because the Fed raising its benchmark rate often prompts financial institutions to offer higher interest rates on deposit accounts.
Retirees with cash sitting in savings accounts, money market funds or short-term certificates of deposit (CDs) could see the value of their accounts edge higher. Plus, the return on their accounts is more likely to keep pace with inflation — or even outpace it — if the rate hike brings inflation under control. “Any move the Fed makes to bring back inflation to 2 percent will help households with money in these accounts,” Quinby says.
Weller says some banks might offer more generous interest rates than others, so he recommends shopping around to make sure you’re getting the best possible rate on a savings account or CD.
What it means for borrowers
Higher interest rates will make it more expensive to borrow money, but Rossman says borrowers won’t feel a big pinch from just one Fed rate hike, especially an uptick of only a quarter percentage point. And not all debt will be affected the same way by an increase in the federal funds rate.
- Credit cards: Credit card annual percentage rates (APRs) have been falling slowly since hitting a record high of 21.76 percent in August 2024, according to Fed data. But that will change with the increase in the Fed’s benchmark rate. “Credit card agreements are written in such a way that a Fed rate hike can be automatically passed through to existing customers,” Rossman says. Cardholders can expect rates to rise within a month or two, he adds. If you’re carrying a balance and have a credit score of 670 or higher, he recommends applying for a balance transfer offer with a 0 percent introductory rate to help you pay off what you owe faster.
- Personal loans: Rates for new personal loans, which currently average 12.21 percent, according to data from consumer financial services company Bankrate, will likely rise slightly. Borrowers with existing fixed-rate personal loans won’t see a change to their rate unless they refinance.
- Auto loans: Although interest rates for auto loans don’t closely track the federal funds rate, car shoppers could see a small increase in auto loan rates, which, on average, are 7 percent for new vehicles and 10.6 percent for used vehicles, according to auto information website Edmunds.
- Mortgages: The Fed’s decision to raise interest rates won’t have much of an impact on mortgage rates since they tend to follow the yield for 10-year Treasury bonds, not the federal funds rate. Recently, mortgage rates averaged 6.76 percent for a 30-year loan and 6.09 percent for a 15-year loan, according to Freddie Mac.
- HELOCs: APRs on home equity lines of credit — which currently average 7.26 percent, per Bankrate’s national survey of lenders — are closely tied to the federal funds rate and could increase by 0.25 percent, Rossman says.
What it means for investors
For investors, a Fed rate increase is often a mixed bag, depending on where their money is parked.
“Bond prices will fall with higher interest rates,” Weller says. So if you have a portfolio that’s heavily invested in bonds or bond funds, the value of your portfolio could decrease — at least in the short term.
The stock market’s trajectory, on the other hand, is a bit unclear. Typically, a federal funds rate hike hurts stock values because higher borrowing costs often lead to lower profits for companies. But that might not be the case with this Fed rate increase, Weller says, pointing out that longer-term rates, such as Treasury bond and mortgage rates, were rising before the Fed’s rate hike and stocks weren’t seeing an impact.
“We’re living through an incredibly quirky period,” he says.
Weller’s take: “The only advice we can give investors is stay the course,” he says. “Don’t adjust your portfolio in the face of uncertainty.”
Looking ahead
The Fed won’t have another opportunity to adjust rates until its regularly scheduled meeting Oct. 27-28. The expectation is that the Fed will raise its benchmark rate by a quarter percentage point at that meeting and another quarter percentage point early next year, Weller says.
With both the current rate hike and potential future increases, Quinby says retirees shouldn’t panic. “I’m taking a wait-and-see approach in terms of my finances,” she says. “When in doubt, you can speak to a financial adviser, who will give you more tailored advice.”
The key takeaways were created with the assistance of generative AI. An AARP editor reviewed and refined the content for accuracy and clarity.
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