In the latest episode of Wallet Wisdom, host Brett sits down with LMCU’s VP of Accounting, Tommy Minchew, and SVP of Finance, Mike Steele, to demystify one of the most talked-about financial topics with this latest decision to maintain interest rates by the Federal Reserve and how it impacts your wallet*. Whether you’re a saver, borrower, or somewhere in between, this episode is packed with practical advice to help you navigate today’s economic landscape.
Understanding the Federal Funds Rate and Why It Matters to You:
The Federal Funds Rate is the interest rate at which banks lend money to each other overnight. Set by the Federal Open Market Committee (FOMC), this rate influences everything from mortgage and auto loan rates to credit card interest and savings account yields.
This is a powerful tool, among others, that the Fed uses to influence the US dollar’s value and guide overall economic activity. It is the interest rate at which financial institutions that have deposits (mainly banks and credit unions) lend reserve balances to other deposit financial institutions overnight on an uncollateralized basis.
In simpler terms, it's the rate banks and credit unions charge each other for short-term loans to meet their reserve requirements.
The federal funds rate directly influences the prime rate, which the Federal Reserve refers to as the Bank Prime Loan Rate. This is the rate that banks and credit unions extend to their most credit-worthy customers and members, which is why it is important to understand what your credit score is and how to improve it to ensure you get the lowest rate possible when you borrow.
What are the primary goals of the Federal Open Market Committee (FOMC)?
Keep inflation around 2% and unemployment between 4–4.5%. When inflation rises, the Fed may increase rates to cool spending. When the economy slows, they may lower rates to encourage borrowing and investment.
How Fed Rate Changes Affect Your Wallet When It Comes to Borrowing and Saving:
The Federal Funds Rate serves as a foundational benchmark for many other interest rates in the economy—including the Prime Rate.
The Prime Rate is the interest rate that commercial banks charge their most creditworthy customers. While it’s not set by the government, it closely follows the Federal Funds Rate. Typically, the Prime Rate is about 3 percentage points higher than the Federal Funds Rate.
Why The Fed Fund Rate Decision and Its Impact on The Prime Rate Matters:
Impact on Borrowing:
When the Fed raises the Federal Funds Rate, the Prime Rate usually increases, making credit cards, personal loans, and home equity lines of credit (HELOCs) more expensive.
When the Fed lowers the rate, the Prime Rate typically drops, which can reduce borrowing costs and stimulate spending.
So, if you're carrying a balance on a credit card or considering a loan, changes in the Fed Funds Rate can directly impact how much interest you’ll pay.
Impact on Saving:
The Federal Reserve’s decisions also indirectly affect savings rates. Although savings accounts aren’t directly tied to the prime rate, they are influenced by the same economic forces. When the Fed raises the federal funds rate, banks and credit unions often raise the interest rates on what they pay you for your Money Market Accounts, CDs, and potentially your savings accounts. In this episode Mike Steele explains, “As the Fed funds rate goes up, it’s good for savers and people who have money in the bank. Whether it’s in savings accounts, CDs or Money Markets, they’re going to earn more on their savings."
So, while the prime rate itself doesn’t dictate savings rates, it moves in the same direction as the federal funds rate which influences what financial institutions offer to savers.
How the Fed Funds Rate Affects CDs and Money Market Accounts
When the Federal Reserve adjusts the Federal Funds Rate, it doesn’t just impact loans and credit cards—it also plays a big role in how much you can earn on savings products like Certificates of Deposit (CDs) and Money Market Accounts.
Impact on Savings Options When Rates Go Up:
- CD rates typically increase, offering higher returns for locking in your money over a set term.
- Money Market Accounts become more attractive, often yielding better interest than standard savings accounts.
- Savers benefit from compounding interest and can grow their emergency funds or long-term savings faster.
Impact on Savings Options When Rates Go Down:
- Financial institutions may lower the interest they offer on CDs and money markets.
- Savers may see reduced earnings on their deposits, making it more important to shop around for competitive rates.
Lake Michigan Credit Union offers competitive CD and money market rates, and even rate matching maturing CDs from other institutions. If you’re not satisfied with your current savings returns, it might be time to explore your options.
📝 Key Takeaways
- If You’re a Saver: Higher rates mean better returns on savings accounts and CDs.
- If You’re a Borrower: Higher rates can increase your monthly payments on loans and credit cards.
- If You’re Budgeting: Rate changes can impact your overall financial strategy—making it essential to stay informed and flexible.
Budgeting Tips to Keep You on Track:
Revisit Your Budget Regularly—Not Just Once a Year
Many families only sit down to review their budget at the start of the year—but that’s not enough, especially in today’s changing economic climate. As discussed in the episode, mid-year is a great time to reassess your financial plan, especially when interest rates, inflation, or personal circumstances shift.
Why revisiting your budget often matters:
- Fed rate changes can impact your loan payments and savings returns.
- Unexpected expenses or income changes can throw off your original plan.
- Seasonal spending (like back-to-school or holidays) can sneak up on you.
Pro Tip: Set a reminder to review your budget every 3–6 months.
Not Sure Where to Start with Budgeting?
Listen as Mike and Tommy break down the 50/30/20 budgeting rule or read our blog around the 50/30/20 rule—a simple yet powerful framework:
Pro Tip: Use LMCU’s free sub-accounts to digitally mimic the envelope system and stay on track with your goals. If you are a member, learn how to set up a new share within online banking. Not a member? Learn more about becoming an LMCU member and start your journey today.
Debt Consolidation Strategies in a Rising Rate Environment:
When is debt consolidation a smart move?
Debt consolidation is a powerful tool for regaining control of your finances. If your monthly finances are feeling unruly, this could be an option to help you take back control of your finances by choosing an option to consolidate all of your debt into one payment while potentially saving you thousands in interest.
Potential options can include:
- Personal Loans: Fixed rates and terms to simplify repayment
- Home Equity Loans: Lower rates for homeowners
- Balance Transfers: 0% intro APR offers (with caution as the 0% has a time limit before it hikes up to on average 24%)
Another option that we get asked about is third-party debt relief companies. Always use caution when going this route and verify they are legitimate. Additionally, be aware that they generally charge additional fees on top of your debt and may hurt your credit. Instead, talk to your credit union or your financial institution to see how they can help, without hidden costs.
Also, remember that there are many strategies for tackling your debt including the snowball, snowblower, and avalanche methods that may work for you.
What’s Next for Fed Fund Rate in 2025?
While the Fed has held rates steady for now, future changes are possible. If you’re planning a big purchase, it might be worth waiting. But if you need to act now, LMCU offers competitive rates on auto loans, mortgages, and more.
Why did the Feds maintain rates?
Maintaining signals a period of economic stability—or at least a “wait and see” approach. While it may not feel like a big change, this decision still carries important implications for your financial planning.
For Budgeters:
- Stay the Course: Use this time to fine-tune your budget. If your income and expenses are stable, consider increasing your savings or paying down debt more aggressively.
- Reevaluate Spending Habits: With no immediate rate changes, it’s a good time to review your discretionary spending and look for areas to cut back or reallocate.
For Savers:
- Take Advantage of Current Yields: CD and money market rates may not rise further in the short term, so locking in a competitive rate now could be a smart move.
- Compare Institutions: Not all banks and credit unions adjust rates equally. LMCU offers rate matching and competitive savings products—so it’s worth shopping around.
Keep in mind, you should still take some time to review your budget, evaluate your financial goals and talk to a trusted advisor to make the most informed decision.
What Makes Credit Unions Different than Banks?
Unlike big banks, credit unions like LMCU are not-for-profit and are member owned.
That means:
- Lower loan rates
- Higher savings yields
- Fewer fees
- Personalized financial support and education
At LMCU, we are a credit union, which means we are member-focused. One difference between Credit Unions and Banks is a measurement that all credit unions are held to called Return of Member. It’s an external scoring system that looks at credit unions, the value that they deliver and how much they give back to members, conducted by Callahan & Associates. LMCU is ranked #1 in Return of Member**. Our members drive everything we do, which makes us proud to continue to be among the top-ranked credit unions.
LMCU Is Here for You
Whether you’re a member or not, LMCU is committed to helping you take control of your financial future. From personalized budgeting tools to expert advice, we’re here to support you—no judgment, just solutions.
Episode FAQS:
What is the Federal Funds Rate?
+The Federal Funds Rate is powerful tool among others that the Fed uses to influence the US dollar’s value and guide overall economic activity. It is the interest rate at which financial institutions that have deposits (mainly banks and credit unions) lend reserve balances to other deposit financial institutions overnight on an uncollateralized basis.
How does this impact the Prime Rate tied to loans and credit cards?
+The prime rate is directly influenced by the Federal Funds Rate, which is set by the Federal Open Market Committee (FOMC). While they’re not the same thing, the prime rate typically moves in tandem with changes to the federal funds rate. Mike Steele explains: “The federal funds rate is a target set by the FOMC… and as that rate goes up or down, banks are more or less willing to lend money or hold money. That drives the rates they set for things like auto loans, mortgage loans, and credit cards.” Here’s how it works: When the Fed raises rates, the prime rate increases, making credit cards and variable-rate loans more expensive. When the Fed lowers rates, the prime rate drops, which can reduce interest costs for borrowers. Tommy Minchew adds: “Almost all credit cards are based off of that prime rate… and sometimes that margin is 10, 14, 15%. So the rate you’re paying on that debt can be pretty high.” This means even a small change in the federal funds rate can significantly affect your monthly payments, especially if you carry a balance on high-interest credit cards.
Who makes decisions about the federal funds rate?
+There’s a committee of 12 people called the Federal Open Market Committee (FOMC) They monitor the health of the U.S. economy, focusing on inflation and unemployment.
Why should the average family care when it changes?
+Changes to the federal fund rate set by the FOMC can impact everything from the value of the US dollar to interest rates charged on your auto loans and credit cards to investments and the stock market, which can impact your 401K. A higher federal funds rate tends to strengthen the US dollar, while a lower rate tends to weaken it.
How do you create a manageable and flexible budget?
+Creating a manageable and flexible budget starts with understanding your income and expenses as well as being honest with yourself about both. In this episode of Wallet Wisdom, Tommy Minchew explains, “If you don’t have a budget and you don’t have that look into your finances ... it’s kind of hard to really accomplish any of your goals.”
Here’s a step-by-step approach discussed in this episode:
- Start with Your Net Income Know exactly how much money you bring home after taxes and deductions. This is your net pay, and it’s the foundation of your budget.
- Use the 50/30/20 Rule To Get Started This simple framework helps you assign tasks to your dollars from your paycheck into buckets and is a great place to begin budgeting. As Tommy Minchew explains, “If you only make X, you can’t spend Y.”
- Track Your Spending Do what works for you. Use a spreadsheet, budget app or even pen and paper to list all of your expenses and compare them to your income.
- Automate and Simplify Take advantage of tools like free sub-savings accounts (offered by LMCU) to digitally separate your savings goals which is a modern approach to the envelope budgeting system. As stated by our host, Brett Christiansen, “You just don’t see it and you don’t touch it ... it becomes easier for me to manage.”
- Re-evaluate Regularly Budgets aren’t static. Revisit yours when: - Your income changes -Expenses increase -Life events (like moving, having a child or paying off debt occur) -Interest rates change
- Stay Disciplined, Not Perfect Remember, budgeting is about progress and not perfection. The most important thing is to stay aware and intentional. “The biggest component is not burying your head in the sand ... and being disciplined with your saving and spending.” - Tommy Minchew
Want to learn more? Take our free budgeting basics course.
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* The information provided in this podcast and article by Lake Michigan Credit Union is general education or marketing in nature and is not intended to be accounting, legal, tax, investment financial or other advice. Statements of individuals are their own and not LMCU’s. All topics discussed are information of a general nature and do not address the circumstances of any particular individual or entity. Consult an appropriate professional concerning your specific situation. As of the date of publishing or any future date this podcast is broadcast, all rates, fees, payments or other specific figures discussed are subject to change and are dependent upon your specific financial situation. All loan products discussed are subject to credit and collateral approval. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other content in the podcast before making any decisions based on such information or other content. In exchange for listening to the podcast you agree not to hold LMCU, its affiliates, or any third-party service providers liable for any possible claim for damages arising from any decisions you make based on information made available to you or other content made available to you through the podcast. For more information on any of the content discussed in this podcast please visit LMCU.org. **Return of Member, Callahan and Associates, June 2025.
Topics: Savings Tips, Wallet Wisdom, Education
