Fed set to raise rates as inflation remains high – what it means for consumers’ borrowing and savings

President Donald Trump and Federal Reserve Chairman Kevin Warsh appear at a swearing‑in ceremony in the East Room of the White House on May 22, 2026.

Yuri Gripas | Bloomberg | Getty Images

Analysts expect the Federal Reserve to increase its benchmark federal funds rate by a quarter‑percentage point at its upcoming meeting, driven by rising energy prices and ongoing tensions with Iran. The move is likely to raise borrowing costs for households already facing financial pressure.

The consumer price index, a comprehensive gauge of inflation, rose again last month, pushing the annual inflation rate to 3.4% in August. Oil and gas price increases were the primary contributors, according to government data.

Chairman Kevin Warsh has signaled his dedication to reducing inflation back to the Fed’s 2% target. A rate increase to achieve this would be the first such move in over three years. However, the decision may clash with President Donald Trump, who has advocated for a lower federal funds rate.

The federal funds rate, set by the Federal Reserve, represents the overnight interest rate banks charge each other for short‑term loans. While consumers do not transact at this rate directly, its fluctuations propagate throughout the financial system, influencing a broad spectrum of borrowing and saving rates.

When the Fed raises its benchmark rate, borrowing becomes more expensive for consumers and businesses, which can cool the economy and, in turn, curb inflation. As a result, households confront higher costs for mortgages, car loans, and credit‑card debt, among other financial products. Conversely, higher rates can increase the income savers earn on deposits.

Credit card APRs could reach record highs

Short‑term consumer debt rates typically track the prime rate, which sits about three percentage points above the federal funds rate. In contrast, longer‑term rates are shaped more by inflation expectations and broader economic conditions.

For instance, most credit cards carry variable rates that move in tandem with the Fed’s benchmark. When the federal funds rate climbs, the prime rate rises accordingly, and credit‑card rates adjust within one or two billing cycles.

“Credit card rates, which are above 20%, will rise once the Fed moves to raise rates, likely to record highs,” said Mark Zandi, chief economist at Moody’s.

A young couple speaking to a car salesman.

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Auto loans are fixed once disbursed, but a Fed rate hike could push up rates on new loans at a time when many car buyers are already struggling with large monthly payments.

According to analysis from WalletHub, the average APR on a 48‑month new‑car loan is projected to increase by roughly 12 basis points in the months following a 25‑basis‑point Fed rate hike.

Federal student loan rates remain fixed for the life of the loan, but the rates set for new borrowers in the upcoming year are already elevated, reflecting the higher yields observed at the May 10‑year Treasury note auction.

Private student loans usually carry variable rates linked to benchmarks such as Libor, the prime rate, or Treasury bill rates. Consequently, borrowers with such loans will see higher interest charges as the Fed lifts rates.

Fed hike may have a mixed impact on home loans

Longer‑term loans are anchored to long‑term Treasury yields.

Last week, the 10‑year Treasury yield—key to most mortgage pricing—climbed to 4.95%, its highest point since October 2023. As a result, the average rate on a 30‑year fixed mortgage rose above 7% for the first time in over a year.

“A Fed hike would not automatically mean higher 30‑year mortgage rates,” said LoanDepot’s chief investment officer and head economist Jeff DerGurahian. “If the market prices in the move ahead of time and the Fed presents it as a measured step to bring inflation back to 2%, investors could view it as positive for longer‑term bonds.”

“If that message lands, longer‑term Treasury yields could hold steady or move lower, allowing 30‑year mortgage rates to do the same. It’s essentially the Fed tapping the brakes now to keep inflation from gaining speed later,” DerGurahian added.

Other home‑loan products feel the Fed’s actions more directly. Adjustable‑rate mortgages (ARMs) and home‑equity lines of credit (HELOCs) are pegged to the prime rate. Most ARMs adjust once a year after an initial fixed‑rate period, while a HELOC rate adjusts immediately.

‘A potentially overlooked upside’

Deposit rates often move in step with changes to the target federal funds rate, providing an advantage for savers.

“A potentially overlooked upside to elevated rates is the opportunity to capture higher yields for savings,” said Mark Hamrick, an economic analyst and founder of The Hamrick Brief. “For both borrowing and saving, it is important to shop around for the best rates to avoid overpaying and to maximize returns,” Hamrick noted.

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