If the Federal Reserve raises interest rates this week, U.S. citizens will face greater pressure on loans, while deposits will benefit.

Huitong Finance, September 15— Driven by rising energy prices and ongoing tensions between the US and Iran, the market widely expects the Federal Reserve to raise the federal funds rate by 25 basis points this week. This rate hike will be the first increase by the Fed in over three years, directly raising the borrowing costs for US residents across various loans, increasing pressure on credit cards, auto loans, and adjustable-rate mortgages. However, the impact varies among different housing loans. At the same time, depositors may see improved returns as a result of the rate hike, though this move could also spark policy disagreements between the Fed and the President.

Market observers predict that, against a backdrop of rising energy prices and persistent US-Iran tensions, the Federal Reserve will announce a 25 basis point increase in the federal funds rate on Wednesday local time. For ordinary consumers, this rate hike will increase the costs of all types of borrowing, putting further financial pressure on US households already stretched by their debts.

If enacted, this would be the first Fed rate hike in over three years—a move that may conflict with Trump’s push to lower the federal funds rate. The federal funds rate is the benchmark for overnight lending between banks, not directly available to consumers, but changes in the benchmark rate ripple through the economy, affecting rates on various loan and deposit products.

Consumer Credit Costs Rise Across the Board, Credit Card Rates May Set New Record Highs

As the Fed raises the benchmark rate, borrowing costs for both businesses and residents increase, aiming to cool the economy and curb inflation. Costs for mortgages, auto loans, and credit card debt all rise for consumers, though interest income on deposits can also improve. Short-term consumer debt interest rates are mostly linked to the prime rate, which typically sits 3 percentage points above the federal funds rate, while long-term rates are more influenced by macro factors such as inflation expectations.

The vast majority of credit cards use variable rates that are directly tied to the Fed’s benchmark rate. As the federal funds rate rises, the prime rate usually moves up in tandem, and credit card rates typically follow within one or two billing cycles. Mark Zandi, Chief Economist at Moody’s Analytics, said:



After an auto loan is issued, its rate remains fixed, but new car loan rates will be affected by the hike. According to a recent analysis by WalletHub, after the Fed raises rates by 25 basis points, the average annual interest rate for a 48-month new car loan is expected to increase by about 12 basis points in the coming months. Federal student loans have fixed rates upon issuance, but based on the latest May auction of 10-year US Treasuries, rates for new federal student loans have already risen; private student loans are usually variable rate, tied to LIBOR, the prime rate, or short-term Treasury rates. After a Fed hike, these borrowers’ interest expenses will also increase, with specific adjustments depending on the chosen benchmark rate.

Diverging Impact on Mortgage Market: Fixed vs. Adjustable-Rate Loans

Pricing for long-term home loans mainly follows the yield on 10-year US Treasuries, which serve as the benchmark for most mortgages. Last week, the 10-year US Treasury yield briefly broke above 4.95%, hitting its highest level since October 2023. As a result, the average 30-year fixed mortgage rate surpassed 7% for the first time in more than a year.

LoanDepot's Chief Investment Officer and Chief Economist Jeff DerGurahian said, "A Fed rate hike does not necessarily mean 30-year fixed mortgage rates will rise in tandem. If the market has already priced in the hike and the Fed communicates that it is steadily guiding inflation back to the 2% target level, investors may see this as positive for long-term bonds." He added that, if policy communication meets expectations, long-term US Treasury yields could remain stable or even decline, keeping 30-year fixed mortgage rates steady. Essentially, the Fed is now tapping the brakes on the economy moderately to prevent a renewed acceleration in inflation down the road.

Other home loans are more directly affected by Fed hikes. Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are both linked to the prime rate. Most ARMs adjust annually after an initial fixed-rate period, while HELOC rates adjust immediately in response to changes in the benchmark rate.

Rate Hikes Not All Bad News—Deposit Returns Set to Improve

In a rate hike environment, deposit rates often rise in step with the federal funds target rate, which is an easily overlooked benefit for savers.

Economic analyst and founder of The Hamrick Report, Mark Hamrick, said, "Rising rates bring an underappreciated benefit: savers get a chance to earn higher yields on deposits." He also advised that, whether borrowing or saving, consumers should shop around for the best rates to avoid excessive borrowing costs and maximize returns on savings.

Conclusion

Overall, after this Fed rate hike, the US household debt market will see a clear divergence. Products pegged to the prime rate—such as credit cards, private student loans, and variable-rate home equity loans—will face rapidly rising repayment pressure, while the trajectory of 30-year fixed mortgages will depend more on the bond market’s interpretation of Fed policy, leaving room for uncertainty. While higher rates weigh on borrowers, savers stand to benefit from better deposit interest rates.

This is the Fed's first rate hike in three years; future policy communications, as well as policy disagreements between the Fed and the White House, will continue to influence American households’ financial costs and shape the outlook for major global assets.