Economists expect the Fed to leave interest rates unchanged at the end of its two-day meeting this week, although many experts expect the central bank to prepare to start cutting interest rates in the coming months.
In prepared remarks earlier this month, Federal Reserve Chairman Jerome Powell said policymakers did not want to ease too quickly.
Powell noted that cutting interest rates too quickly risks losing the battle against inflation and will likely be forced to raise interest rates further, while waiting too long poses a risk to economic growth.
But in the meantime, consumers will see little relief from sky-high borrowing costs.
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In 2022 and the first half of 2023, the Fed raised interest rates 11 times, sending consumer borrowing rates higher while inflation remained high, putting households under pressure.
With the combination of persistent inflation and rising interest rates, “many consumers are experiencing higher levels of economic stress than a year ago,” said Silvio Tavares, CEO of credit scoring firm VantageScore.
The federal funds rate, set by the U.S. central bank, is the interest rate at which banks borrow and lend to each other overnight. Although this is not the rate that consumers pay, the Fed's moves still affect the borrowing and saving rates they see every day.
Even once the central bank lowers interest rates — which some now expect could happen in June — the pace at which they lower them will be much slower than the pace at which they raise them, according to Greg McBride, chief financial analyst at the Bank of England. Pancreatic.
He added: “Interest rates took the escalator to the top, and they will take the stairs to go down.”
Here's a breakdown of where consumer prices are now and where they may be headed:
credit cards
Since most credit cards have a variable interest rate, there is a direct connection to the Federal Reserve Bank's standard. Due to the central bank's cycle of rate hikes, the average credit card rate has risen from 16.34% in March 2022 to nearly 21% today – an all-time high.
With most people stressed by rising rates, balances are higher and more cardholders are taking on debt from month to month compared to last year.
Annual percentage rates will start to fall when the Fed lowers interest rates, but even then will only ease very high levels. With only a few possible quarter-point cuts, the annual interest rate will still be around 20% by the end of 2024, McBride said.
“If the Fed cuts interest rates twice by a quarter point, your credit card rate will drop by half a percent,” he said.
Mortgage rates
Fifteen-year and thirty-year mortgage interest rates are fixed, tied to Treasury yields and the economy. But anyone shopping for a new home is losing a lot of purchasing power, in part because of inflation and the Federal Reserve's policy moves.
Interest rates have already fallen significantly since reaching 8% in October. Now, the average rate on a 30-year fixed-rate mortgage is about 7%, up from 4.4% when the Fed started raising interest rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.
“Despite the recent decline, mortgage interest rates remain high as the market faces inflation pressures,” said Sam Khater, chief economist at Freddie Mac. “In this environment, there is a high probability that interest rates will remain high for a longer period of time.”
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are tied to a prime rate, and those rates stay high.
“The reality is a lot of borrowers are paying double-digit interest rates on those right now,” McBride said. “This is not a low cost of borrowing and that is not going to change.”
Car loans
Although car loans are fixed, payments became larger because car prices were rising along with interest rates on new loans, resulting in lower monthly payments.
The average interest rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising interest rates, according to Edmunds. However, competition among lenders and more incentives in the market have begun to take some of the benefits out of the cost of buying a car recently, said Evan Drury, director of insights at Edmunds.
Once the Fed lowers interest rates, it gives people more breathing room, Drury said. “Last year was ugly all around. At least there's an upside this year.”
Federal student loans
Federal interest rates on student loans are also fixed, so most borrowers are not immediately affected by the Fed's moves. But undergraduates taking out new direct federal student loans now pay 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.
Private student loans tend to have a variable interest rate tied to Treasury bonds or another price index, meaning these borrowers actually pay more in interest. However, the amount varies depending on the standard.
For those struggling with existing debt, there are ways federal borrowers can ease their burdens, including income-driven plans with $0 monthly payments, economic hardship and unemployment deferrals.
Private loan borrowers have fewer options for forgiveness — although some may consider refinancing once interest rates start to fall, and those with better credit may actually qualify for a lower interest rate.
Savings rates
While the central bank has no direct influence on deposit interest rates, returns tend to be tied to changes in the target federal funds rate.
As a result, interest rates on higher-yielding online savings accounts have made big moves and now pay more than 5% — above the rate of inflation, a rare win for anyone building an emergency savings account, McBride said.
He advised that since these rates have likely reached their ceiling, this is a good time to secure certificates of deposit, especially for maturities longer than one year. “There's no incentive to wait for something better because that's not the way the wind is blowing.”
Currently, the average yield on one-year CDs is 1.73%, but higher-yield CD rates pay more than 5%, which is as good as or better than higher-yield savings accounts.
