The recent announcement from the Federal Reserve to leave interest rates unchanged has sent waves of disappointment through the market. This decision was made due to the persistent issue of inflation, which has proven to be stickier than anticipated. The CME’s FedWatch measure of futures market pricing indicates that the market is now pricing in one rate cut later in the year. This is quite a stark contrast from the beginning of 2024 when the market was expecting at least six reductions, which was deemed as “completely fantasy land” by Greg McBride, chief financial analyst at Bankrate.com. The change in rate cut expectations has left many households in a tight spot, particularly when it comes to managing budgets in the face of high inflation and cumulative price increases over the past three years.
Inflation has been a looming problem since the onset of the Covid-19 pandemic, which saw price increases soar to levels not seen since the early 1980s. To combat this, the Fed initiated a series of interest rate hikes that pushed its benchmark rate to the highest level in over 22 years. While the Federal Funds Rate directly impacts banks’ borrowing and lending practices, it indirectly affects consumers’ borrowing and savings rates. The spike in interest rates led to a surge in borrowing costs for consumers, adding to the financial pressure faced by many households. Furthermore, wage growth has been stunted by increasing inflation, as real average hourly earnings rose by a mere 0.6% over the past year.
Looking ahead, even with the possibility of rate cuts on the horizon, consumers should not expect a significant drop in borrowing costs. Professor Brett House from Columbia Business School highlights that while the Fed’s rate cut may lead to reductions in other rates, it is not a guarantee. Various borrowing costs, including credit cards, mortgage rates, auto loans, and savings accounts, are still expected to remain high in the latter half of 2024.
Credit card rates, which are variable, have seen a notable increase, with the average rate jumping from 16.34% in March 2022 to nearly 21% presently. While the Fed’s rate cuts may provide some relief, credit card APRs are unlikely to fall significantly. Similarly, mortgage rates have risen substantially, making purchasing a home more challenging for consumers. The average rate for a 30-year, fixed-rate mortgage has climbed to above 7.3%, significantly higher than previous years. Auto loans have also experienced an uptick in rates, impacting monthly payments for consumers. Student loan rates are fixed for federal loans, but private borrowers may face higher interest costs. While there are options for federal borrowers to reduce their debt burden, private loan borrowers have limited relief options.
While borrowers are faced with high borrowing costs, savers are enjoying the benefits of higher deposit rates. The recent trend of top-yielding online savings accounts offering over 5.5% returns has been a rare win for those looking to build up their savings. This provides an opportunity for individuals to earn returns that outpace inflation, offering a sense of financial security amidst the economic uncertainties.
The Federal Reserve’s decision to leave interest rates unchanged has far-reaching implications for consumers, borrowers, and savers. While challenges exist in managing high borrowing costs, there are also opportunities for savers to benefit from the rising deposit rates. It is essential for individuals to carefully navigate these financial landscapes and make informed decisions to secure their financial well-being in the face of evolving economic conditions.