The Federal Reserve is stopping at the increase in ratesmarking the first break after 15 months of consecutive increases, a change that could offer a touch of relief for consumers struggling with more expensive mortgages, credit cards and other loans after 10 consecutive rate hikes.
The difference in borrowing costs since March 2022, when the Fed began raising rates in an effort to suppress inflation, is stark. At the start of 2022, the rate on a 30-year conventional mortgage was about 3.2%, now it’s 6.8%, meaning the monthly mortgage payment on a typical $300,000 home now it costs 50% more. The annual percentage of credit cards it has reached all-time highs and now the maximum 20%while the costs of other loans are also higher.
The central bank has raised rates in order to tame the highest inflation in 40 years. The good news is that federal data on Tuesday showed that the effort is working, with May’s consumer price index up. climbing at a slower pace in two years Because of the progress in inflation, economists expected the Fed to hold off on another rate hike on Wednesday to gauge the strength of the economy and ensure the bank doesn’t “accidentally tighten” according to Goldman Sachs analysts.
“Stopping rate hikes is definitely better than continuing, but most of the damage has already been done,” noted Matt Schulz, chief credit analyst at LendingTree. “If everyone was confident that there would be no more rate hikes in the future, that would be a slightly different view. But it’s certainly still up in the air as to whether it’s a short pause or whether it’s a longer term. change.”
Here’s how the Fed’s move to hold the line on interest rates could affect your money.
Mortgage rates
Mortgage rates are likely to remain stable after the Fed pause. That could give consumers a boost after the rapid rise in home loans, Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, said in an email.
Raneri said a homebuyer taking out a 30-year loan at the current rate of 6.8% for a $300,000 home would have monthly payments of $1,956, a 50% increase over the mortgage payment monthly payment of $1,297 that the same borrower would have paid in January 2022. when mortgage rates were at 3.2%.
Still, rates could fluctuate this year as the housing market reacts to economic uncertainty, according to Jacob Channel, senior economist at LendingTree. Mortgages have fallen since debt ceiling problem liquidated, a sign that the home loan market is sensitive to trends beyond the underlying federal funds rate, Raneri said.
“Going forward, mortgage rates are likely to continue to fluctuate as the housing market continues to react to the uncertainty pervading the current economy,” Channel said in an email. “That said, if the economy cools over the next few months, mortgage rates may end the year closer to 6% than 7%.
Selma Hepp, chief economist at real estate research firm CoreLogic, added in an email that mortgage rates, while gradually declining, “are likely to remain higher for the remainder of the year.”
Credit card fees
Consumers with credit card balances aren’t likely to see relief anytime soon, according to LendingTree’s Schulz. In fact, APRs could continue to rise, even despite a Fed pause, because some banks are still incorporating the Fed’s most recent rate hikes into their own fee schedule, he noted.
The typical rate for a new credit card is likely to jump above 24% this month, from a record 23.98% in LendingTree’s May analysis, Schulz noted.
“That’s very, very high,” he added.
APRs on existing credit cards are nearly 21 percent, which is the interest rate paid by people who carry revolving balances on their cards, and is the highest since 1994, Schulz noted.
Borrowers face interest rates essentially 5 percentage points higher than in March 2022, when the Fed began raising rates, according to TransUnion.
“Based on the current average total card balance per consumer of $5,800, this translates to an additional $290 in annual card interest rate charges per consumer,” Raneri noted.
Loans for cars
New vehicle loan rates have remained steady over the past few months at an average of 7%. That’s unlikely to change even with the Fed leaving rates alone for now, said Ivan Drury, senior director at Edmunds.com. Auto loan rates tend to reflect demand from vehicle buyers rather than the Fed’s interest rate decisions.
Car sales, while still well below pre-pandemic levels, are still quite strong, while vehicle prices remain high after skyrocketing during the pandemic. Unless sales slow significantly, companies and dealers are unlikely to lower prices or offer better loan rates.
New vehicle prices averaged $47,892 in May, down 1.3% from December’s peak. However, any decline has been offset by higher lending rates, which have risen by almost half a percentage point over the same period.
Savings accounts, CDs
Yields on savings accounts and certificates of deposit are the highest they’ve been in a decade, although the rate of increase is slowing. With the Fed holding off on hikes for now, any further increase in yields may be relatively small, said Ken Tumin, banking expert and founder of DepositAccounts.com.
“Banks will have reason to hold back on raising their deposit rates,” he said.
Still, it’s worth noting that these accounts are much more rewarding than they were a year ago. According to DepositAccounts.com, the average online savings account yield is now 3.98%, up from 3.31% earlier this year and 0.73% a year ago. The average 12-month CD yield online is 4.86%, up from 4.37% earlier this year and 1.49% a year ago.
What’s next for the Fed?
The Fed signaled it could resume raising rates later this year, with policymakers forecasting a final rate of about 5.6%, signaling two more rate hikes before the end of 2023 .
That surprised Wall Street, with stocks falling after the Fed’s announcement. The Dow Jones Industrial Average fell 1% on predictions that more rate hikes could be coming.
“The battle against inflation is being won. Now is the time for the Fed to stop, not stop, interest rate hikes,” said Nigel Green of the deVere Group, a group of financial advisers, in an email “The lag in monetary policies is notoriously long.”
In other words, consumers can wait until they see significantly lower borrowing costs.
With reporting from The Associated Press.
