Interest rates are set by two decision-makers working in sequence. The Federal Reserve, through its Federal Open Market Committee, sets a benchmark rate that governs overnight lending between banks. Your individual bank, credit union, or credit card issuer then decides the specific rate you pay or earn, building on that benchmark and pricing in your credit risk and its own costs. Federal and state law cap how high some of those rates can go. As of March 2026, the Fed’s target range sits at 3.50% to 3.75%, and the prime rate most consumer loans are priced off of is 6.75%.
The Federal Reserve and the FOMC
Congress created the Federal Reserve in 1913 and later gave it a statutory mandate to promote maximum employment, stable prices, and moderate long-term interest rates.1Office of the Law Revision Counsel. 12 US Code 225a – Maintenance of Long Run Growth of Monetary and Credit Aggregates The people who actually vote on rate changes sit on the Federal Open Market Committee. It has up to twelve voting members: the sitting Fed governors (up to seven), the president of the Federal Reserve Bank of New York as a permanent voter, and four of the eleven other regional Reserve Bank presidents on a one-year rotation.2Board of Governors of the Federal Reserve System. Who Is on the Federal Open Market Committee
The FOMC meets eight times a year on a published schedule.3Federal Reserve Board. FOMC Calendars and Information At each meeting, members review inflation data, employment figures, consumer spending, and global conditions before voting on a target range for the federal funds rate. Fed governors are appointed by the President and confirmed by the Senate, and once seated they cannot be removed for their policy views.4Board of Governors of the Federal Reserve System. Who Are the Members of the Federal Reserve Board, and How Are They Selected That structure keeps rate decisions at arm’s length from election-cycle politics.
What the Fed Actually Controls
The federal funds rate is the interest rate banks charge each other for overnight loans of reserves they hold at the Fed.5FRED | St. Louis Fed. Federal Funds Effective Rate The FOMC doesn’t pick a single number. It sets a quarter-point target range, currently 3.50% to 3.75%.6FRED | St. Louis Fed. Federal Funds Target Range – Upper Limit Virtually every other interest rate in the economy takes its cue from that one.
The main tool the Fed uses to keep actual overnight lending inside its target is the interest it pays banks on the reserve balances they park at the Fed, called IORB. Raise that rate and banks demand more to lend reserves out; lower it and they accept less.7Board of Governors of the Federal Reserve System. Interest on Reserve Balances Frequently Asked Questions The Fed also still buys and sells government securities through open market operations, though IORB is now the primary lever.8Federal Reserve Board. Open Market Operations
How the Fed’s Rate Reaches Your Wallet
A rate change at the FOMC doesn’t hit your bank statement directly. It travels through the prime rate, a reference number that individual banks set and most peg to the federal funds rate.9Board of Governors of the Federal Reserve System. What Is the Prime Rate, and Does the Federal Reserve Set the Prime Rate The standard convention is to add roughly 3 percentage points to the upper end of the Fed’s target range, which puts the prime rate at 6.75% today. When the FOMC moves, banks usually adjust their prime rate within days.
Credit Cards
Most credit cards carry a variable rate calculated as the prime rate plus a margin the issuer assigns based on your credit. Those margins have averaged 10 to 15 percentage points in recent years, which is why the average credit card APR sits near 21% even with the prime rate below 7%.10Consumer Financial Protection Bureau. Credit Card Interest Rate Margins at All-Time High A quarter-point Fed cut typically drops your card rate by the same amount, because prime moves and your margin stays fixed.
Savings Accounts
Deposit yields also trace back to the federal funds rate. The national average for a traditional savings account is 0.39%, according to FDIC data from February 2026.11FDIC. National Rates and Rate Caps – February 2026 Online-only banks often pay considerably more. When the Fed raises rates, savings yields tend to follow, though banks pass through increases to depositors more slowly than they raise borrowing costs.
Why Mortgage Rates Don’t Follow the Fed
This is where most people’s mental model breaks down. The Fed cuts, but the 30-year fixed mortgage barely moves. Mortgage rates track the 10-year Treasury yield, not the federal funds rate.12Fannie Mae. What Determines the Rate on a 30-Year Mortgage The federal funds rate governs overnight lending; a 30-year mortgage is priced in the bond market, where investors want compensation for tying up capital for decades. Because most mortgages are refinanced or paid off well before 30 years, the 10-year Treasury is the closest match for their effective life. Lenders then add a spread on top, historically 1.5 to 2.5 percentage points, to cover credit risk and operating costs.
The practical result: Fed cuts often help with credit card debt, auto loans, and home equity lines, but they don’t guarantee lower mortgage rates. If inflation expectations push Treasury yields up while the Fed is cutting short-term rates, mortgage rates can rise anyway.
Student Loans Follow a Different Rule
Federal student loan rates are set by a formula Congress wrote into law. Each May, the Treasury auctions 10-year notes, and the winning yield becomes the base rate. A fixed add-on is then applied depending on the loan type. For the 2025–2026 academic year, that formula produced 6.39% for undergraduate loans, 7.94% for graduate loans, and 8.94% for Parent PLUS loans.13Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1 2025 and June 30 2026 Once the rate is set for a given disbursement year, it stays fixed for the life of the loan. Neither the Fed nor your lender has any say. Private student loans, by contrast, are priced by the lender using its own criteria.
What Your Lender Adds on Top
After the Fed and the bond market do their part, the rate you personally receive depends on factors that are largely within your control.
Credit Score
Your FICO score is the biggest factor lenders use to price the risk of lending to you. On a mortgage, the gap between the best and worst commonly approved tiers can easily be 1.5 percentage points or more, which adds up to tens of thousands of dollars over 30 years. On credit cards, the gap is wider still: a borrower with excellent credit might see a margin several points below someone with only fair credit.
Fixed Versus Variable
A fixed rate locks in your cost for the life of the loan, so Fed decisions after closing don’t touch your payment. A variable rate resets periodically against an index like the prime rate, and every FOMC move flows through. Adjustable-rate mortgages must include caps: a common structure limits the first adjustment to two or five points, each subsequent adjustment to one or two points, and the total lifetime rise to five points above the starting rate.14Consumer Financial Protection Bureau. What Are Rate Caps With an Adjustable-Rate Mortgage and How Do They Work
Lender Competition
Two lenders looking at the same prime rate and the same credit report can offer rates half a point apart because one has lower overhead or wants to grow its book faster. Shopping at least three or four lenders is the easiest part of the rate equation to control, and it is entirely in your hands.
Legal Limits on What You Can Be Charged
Several layers of law set outer bounds on interest rates and require lenders to tell you what you’re really paying.
Truth in Lending Act
The federal Truth in Lending Act requires lenders to disclose the annual percentage rate and the total finance charge before you sign.15Office of the Law Revision Counsel. 15 US Code 1601 – Congressional Findings and Declaration of Purpose The APR bundles the interest rate together with origination fees, points, and other charges, and every lender calculates it the same way, which makes it the fairest number for comparing offers.16Consumer Financial Protection Bureau. What Is the Difference Between a Loan Interest Rate and the APR
Military Lending Act
Active-duty service members and their dependents get an extra layer of protection. The Military Lending Act caps the rate on most consumer credit for covered borrowers at 36% APR, fees included.17Office of the Law Revision Counsel. 10 US Code 987 – Terms of Consumer Credit Extended to Members and Dependents That threshold shuts out most payday and high-cost installment lenders for covered borrowers.
State Usury Laws
Every state sets maximum interest rates through usury laws, but the caps vary widely. Some states cap general-purpose loans at rates as low as 6%; others allow 30% to 45%, or set no cap at all for certain loan types or corporate borrowers. Federal preemption lets nationally chartered banks export the usury law of their home state, which is why major credit card issuers tend to be incorporated where the caps are highest or absent.