Question 1

How does the federal funds rate actually reach my wallet?

Accepted Answer

The federal funds rate is the rate banks charge each other for overnight loans of reserves. It is the wholesale price of money, and you never touch it directly. What you touch is the prime rate, which is the benchmark banks use for consumer lending. Prime moves in lockstep with the federal funds rate. When the Fed hikes by 25 basis points, prime rises 25 basis points, usually the same day. Your credit card, your HELOC, your variable-rate line of credit are priced as "prime plus a margin," so the reset arrives on your next statement. Fixed mortgages and fixed auto loans are a slower story. Those ride the 10-year Treasury yield, which moves on the Fed's narrative, not its immediate action.

Question 2

Which of my loans are variable and which are fixed?

Accepted Answer

Credit cards are almost always variable and tied to prime. HELOCs are variable by default, though some will let you convert drawn balances to a fixed rate. Federal student loans originated since 2006 are fixed for life. Private student loans can be either. Auto loans are fixed at origination. Mortgages depend on what you signed. A 30-year fixed is fixed. An ARM resets on a schedule spelled out in the note, annually or every five years or something in between. If you cannot remember, the promissory note knows. So does your servicer's website. Pull it up before you assume.

Question 3

What is a basis point?

Accepted Answer

One basis point is one one-hundredth of a percent. Written out, 0.01%. The Fed and the bond market speak in basis points because the moves that matter are often smaller than a full percentage point, and "the Fed cut by a quarter of a percent" is ambiguous in a way "the Fed cut 25 basis points" is not. A 100 basis point move is a full percent. Sometimes written bp, sometimes bps. Same thing.

Question 4

How quickly do Fed rate changes show up on my monthly bill?

Accepted Answer

Credit cards reflect the new prime rate on the next statement cycle. Thirty to sixty days. HELOCs are roughly the same. Adjustable-rate mortgages reset only on their contract-specified reset dates. Annually, every five years, whatever the note says. The Fed cuts today and your ARM does not notice for four years. Fixed-rate loans originated before the change keep their original rate for the full term, forever, no matter what the Fed does next. New originations reprice inside of a week. Which means if you are shopping for a mortgage or a car loan, when you sign matters.

Question 5

Why is a HELOC more Fed-sensitive than a first mortgage?

Accepted Answer

A first mortgage is usually a 30-year fixed priced off the 10-year Treasury yield at origination. A HELOC is a revolving credit line priced as prime plus a margin. Prime moves with the federal funds rate, immediately. So you can have a first mortgage that is completely insulated from a Fed hike, and a HELOC against the same house where the minimum payment jumps on the next statement. Same property, same homeowner, different loans. One is stone. The other is glass.

What does a Fed move cost you, exactly?

List what you owe

The Fed, on your bill.

Mortgage Calculator

Savings Rate Tracker

Economic Calendar