How Trump vs. Powell Could Flip Your Mortgage and Savings Rates Overnight
The Federal Reserve doesn’t directly set interest rates, but a change in Fed policy could indirectly move your mortgage and savings rates fast.
With President Trump saying that he will fire Fed chair Jerome Powell if he stays beyond the end of his term on May 15, savers and investors should be paying close attention to the news coming out of Washington.
Here's the breakdown.
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What the Fed Does
Mortgage and savings rates are set by individual lenders, not the Federal Reserve. But the Fed does set the federal funds rate, which is the rate that banks charge each other for overnight loans.
What matters for the average consumer is that individual lenders, who set the rates on mortgages, savings accounts and other instruments, base their decision on the level and direction of the fed funds rate.
Institutions often change rates based on expectations, even before the Fed actually sets them. This means even discussions about changing the Fed chair can push rates up or down quickly.
How Consumer Interest Rates Could Change
Consumer interest rates for mortgages, savings accounts, credit cards and loans change frequently in response to Fed policy. Here’s what consumers need to know.
Mortgage Rates
Mortgage rates may not be set directly by the Fed, but they closely follow the yield of the 10-year U.S. Treasury note. Treasury yields move based on a combination of factors, but inflation expectations and future Fed policy are two of the most important.
If bond market participants fear higher inflation or general instability, Treasury rates can spike.
Conversely, if inflation remains under control and the Fed seems to be “on hold,” rates tend to stay the same or trend downwards.
Future expectations and general market conditions can push around the 10-year Treasury yield on a daily basis. This is why mortgage rates can change noticeably in just a matter of days.
Savings Accounts
Savings accounts tend to move more directly in line with Fed policy. When the Fed raises rates, banks generally increase yields to stay competitive, as they are earning more from those higher yields themselves. What rate cuts are expected, the opposite is true, with banks lowering rates.
Credit Cards and Loans
Most credit cards have variable interest rates. When market rates trend higher, banks raise the interest rates they charge consumers. When rates decrease, credit card rates tend to fall as well.
It's worth noting that, while rate increases fall in line with Fed rate increases nearly instantaneously, there’s usually a lag when it comes to rates falling.
The same pattern holds true for other types of consumer loans, such as auto loans and personal loans.
The Bottom Line
The Fed’s mandate is to manage inflation and employment. While the specifics of Fed policy can be complicated, the bottom line is that rates tend to rise during inflationary periods and fall when the economy slows. As most consumer interest rates are variable, it pays to keep an eye on the way that Fed rates are trending.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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