The Federal Reserve said Wednesday it will keep interest rates unchanged as inflation continues to prove more stubborn than expected.
But the move also dashes hopes that the Fed can soon begin cutting interest rates and provide relief to consumers from sky-high borrowing costs.
According to CME's FedWatch gauge of futures pricing, the market is now expecting a rate cut later this year. They started 2024 expecting at least six cuts, which was “totally fantasyland,” said Greg McBride, chief financial analyst at Bankrate.com.
These changing interest rate cut expectations are leaving many households in a bind, he said. “From a fiscal perspective, inflation is certainly not only still high, but in addition to the cumulative price increase over the last three years.”
“Prioritizing debt repayment, particularly high-cost credit card debt, remains paramount as interest rates are expected to remain high for some time,” McBride said.
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Inflation has been an ongoing problem since the Covid-19 pandemic, when price increases reached their highest level since the early 1980s. The Fed responded with a series of interest rate hikes that brought its key interest rate to its highest level in more than 22 years.
The Federal Funds Rate, set by the Federal Reserve, is the interest rate at which banks borrow and lend money to each other overnight. Although this is not the interest rate consumers pay, the Fed's actions still impact the borrowing and savings rates they see every day.
The rise in interest rates caused most consumer borrowing costs to skyrocket and put many households under pressure.
Rising inflation has also been bad news for wage growth, as real average hourly wages rose just 0.6% last year, according to the Labor Department's Bureau of Labor Statistics.
According to Brett House, an economics professor at Columbia Business School, even with the threat of interest rate cuts, consumers' borrowing costs will not fall significantly.
“Once the Fed cuts rates, it could lead to cuts in other interest rates, but there is nothing that necessarily guarantees that,” he said.
From credit cards and mortgage rates to auto loans and savings accounts, here's where those rates could go in the second half of 2024.
Credit cards
Since most credit cards have a variable interest rate, there is a direct connection to the Fed's benchmark. As part of the interest rate hike cycle, the average credit card interest rate rose from 16.34% in March 2022 to almost 21% today – an all-time high.
Once the central bank cuts interest rates, APRs will start to fall, but even then they will only fall at extremely high levels. According to Matt Schulz, chief credit analyst at LendingTree, APRs are unlikely to fall much, with few potential quarter-point cuts possible.
“If Americans want lower interest rates, they have to do it themselves,” he said. Try calling your card issuer and asking for a lower interest rate, consolidating and paying off high-interest credit cards with a lower-interest personal loan, or switching to a no-interest balance transfer credit card, advises Schulz.
Mortgage interest rates
Although 15- and 30-year mortgage rates are fixed and tied to U.S. Treasury yields and the economy, anyone buying a new home has suffered significant losses in purchasing power, due in part to inflation and monetary policy measures Fed.
The average interest rate on a 30-year fixed-rate mortgage is just over 7.3%, up from 4.4% when the Fed began hiking rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.
“Going forward, mortgage rates will likely continue to fluctuate and it is impossible to say with certainty where they will end up,” noted Jacob Channel, senior economist at LendingTree. “Still, there’s a good chance we’ll have to get used to interest rates above 7% again, at least until we get better economic news.”
Car loans
Even when car loans are fixed, the payments continue to get higher as car prices have increased along with interest rates on new loans, resulting in less affordable monthly payments.
According to Edmunds, the average interest rate on a five-year new car loan is now more than 7%, up from 4% in March 2022. However, competition between lenders and more incentives in the market have recently begun to drive down the cost of buying a car somewhat, said Ivan Drury, Director of Insights at Edmunds.
“Any reduction in tax rates will be particularly welcome as there are increasing numbers of consumers with older trade-ins who have weathered the market madness and have been waiting for an automotive landscape that looks more like the last time they owned a vehicle was six or seven years ago “Bought before,” Drury said.
Student loans
Interest rates on federal student loans are also fixed, so most borrowers are not directly affected. But undergraduate students who took out direct federal student loans for the 2023-24 academic year now pay 5.50%, up from 4.99% in 2022-23 – and any loans paid off after July 1 are likely to be even higher. Interest rates for the coming school year will be based on an auction of 10-year Treasury notes later this month.
Private student loans typically have a variable interest rate tied to the Prime, Treasury Bill, or other interest rate index, meaning these borrowers already pay more in interest. However, how much more varies depending on the benchmark.
For those struggling with existing debt, there are ways federal borrowers can reduce their burden, including income-based plans with $0 monthly payments and economic hardship and unemployment deferrals.
Private loan borrowers have fewer options for relief — although some may consider refinancing once interest rates start to fall, and those with better credit may already qualify for a lower rate.
savings interest
While the central bank does not have a direct influence on deposit rates, returns tend to correlate with changes in the target federal funds rate.
As a result, interest rates on the highest-yielding online savings accounts have changed significantly, now paying more than 5.5% — above the rate of inflation, a rare win for anyone building a cash cushion, McBride said.
“The mantra of longer-term higher interest rates is music to the ears of savers, who will continue to enjoy above-inflation returns on safe-haven savings accounts, money markets and CDs for the foreseeable future,” he said.
Currently, certificates of deposit with the highest yield pay over 5.5%, making them as good or better than a high-yield savings account.
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