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The Federal Reserve announced its decision to keep interest rates unchanged, paving the way for future rate cuts and offering potential relief from the impact of higher rates and inflation on consumers. While the central bank signaled the possibility of up to three cuts in the coming year, experts suggest that the pace of rate reductions will be more measured compared to the rapid rate hikes implemented in response to the persistent inflationary pressures.
“Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to its highest in more than 22 years,” according to reports.
Impact on Borrowing Costs
The spike in interest rates has substantially increased borrowing costs for consumers, putting a strain on household budgets. Greg McBride, Chief Financial Analyst at Bankrate, highlighted that even as inflation eases, high prices continue to impact budgets, with credit card debt on the rise.
The expected rate cuts are anticipated to bring relief to consumers, leading to a reduction in borrowing costs. However, the pace of decrease is expected to be gradual. McBride used the metaphor, “Interest rates took the elevator going up; they are going to take the stairs coming down.”
Borrowing Costs Across Financial Products
Credit Cards
As most credit cards have variable rates directly connected to the Fed’s benchmark, the average credit card rate reached an all-time high of nearly 21% due to the recent rate hikes. The anticipated rate cuts are expected to bring down annual percentage rates (APRs), but given the modest potential quarter-point cuts, APRs may still hover around 20% by the end of 2024.
Mortgage Rates
Higher mortgage rates in 2023 made it the least affordable year for homebuying in at least 11 years. While 15- and 30-year mortgage rates are fixed, they are influenced by Treasury yields and economic conditions. The current average rate for a 30-year, fixed-rate mortgage is 6.9%, up from 4.4% when the Fed started raising rates. Experts expect mortgage rates to dip below 6% in 2024, but the overall affordability challenge may persist until supply increases, interest rates decrease, and real incomes rise.
Auto Loans
Auto loan rates, although fixed, have contributed to increasing monthly payments due to higher vehicle prices and elevated interest rates. The average rate on a five-year new car loan is now over 7%, up from 4% when the Fed began raising rates. Rate cuts may help soften the rising cost of financing a car, potentially bringing rates below 7%.
Savings Rates
While the Federal Reserve doesn’t directly control deposit rates, changes in the target federal funds rate often correlate with movements in savings account rates. Currently, top-yielding online savings account rates exceed 5%, the highest in nearly two decades. Even with the expectation of rate cuts, savers may still experience a favorable environment, and the highest-yielding offers could reach 4.45% by year-end.
Financial Planning Tips
Greg McBride advises consumers to consider locking in certificates of deposit (CDs), especially those with maturities longer than one year. While CD yields have peaked and begun to pull back, securing longer-term CDs can offer advantages as rates may continue to decline.
In summary, the Federal Reserve’s decision to keep interest rates steady while planning gradual rate cuts provides a potential silver lining for consumers, offering relief from the impact of rising borrowing costs and inflation. However, the journey to lower rates is expected to be a measured one, with consumers advised to make strategic financial decisions in response to changing interest rate environments.