The Federal Reserve is expected to keep interest rates unchanged at the end of its two-day meeting this week, despite the anticipation of upcoming rate cuts. Federal Reserve Chair Jerome Powell has expressed the need for caution in easing rates too quickly, as this could lead to a loss in the battle against inflation and potentially require further rate hikes. On the other hand, waiting too long to adjust rates could pose a threat to economic growth. The combination of sustained inflation and higher interest rates has put many households under financial pressure, causing increased levels of economic stress among consumers.
Since most credit cards have variable rates, there is a direct link to the Fed’s benchmark rate. The average credit card rate has risen to nearly 21% due to the Fed’s rate hike cycle, reaching an all-time high. This has resulted in higher balances for cardholders and an increase in the number of individuals carrying debt from month to month. While APRs are expected to come down after potential rate cuts by the Fed, they are likely to remain around 20% by the end of 2024, even with a few quarter-point cuts.
Mortgage rates, particularly for fixed 15- and 30-year loans, have been impacted by inflation and the Fed’s policy decisions. The average rate for a 30-year fixed-rate mortgage has increased to around 7% from 4.4% when the Fed began raising rates. Despite a recent dip, mortgage rates are expected to stay high as the market deals with persistent inflation. Adjustable-rate mortgages and home equity lines of credit, tied to the prime rate, are also facing high interest rates, with little expectation for change in the near future.
Auto loans, while fixed, have seen an increase in payments due to rising car prices and interest rates on new loans. The average rate on a five-year new car loan has surpassed 7%, up from 4% at the start of the Fed’s rate hikes. Competition between lenders and market incentives have helped alleviate some of the cost burden, but the overall cost of buying a car remains high. The potential Fed rate cuts may provide some relief to consumers in this area.
Federal student loan rates are fixed, but undergraduate students taking out new loans are now paying higher rates compared to previous academic years. Private student loans, tied to variable rates, are already feeling the impact of increased interest costs. While federal borrowers have options for repayment relief, such as income-based plans and deferments, private loan borrowers may have fewer avenues for assistance. Refinancing may be an option for some private loan holders once rates begin to decrease.
While the Federal Reserve does not directly influence deposit rates, the yields tend to correlate with changes in the federal funds rate. Online savings accounts currently offer competitive rates, with some exceeding 5%, providing a rare win for those looking to build emergency savings. The time may be right to consider locking in certificates of deposit, especially for longer maturities. One-year CDs are averaging around 1.73%, but top-yielding CDs can offer rates over 5%, similar to or better than high-yield savings accounts.
Despite the potential for Federal Reserve rate cuts in the future, consumer credit rates are expected to remain high across various financial products. While borrowers may see some relief with lower rates after Fed adjustments, the overall impact on interest costs is likely to be moderate. It is important for consumers to carefully evaluate their borrowing and saving strategies in light of the current economic environment and expected policy changes.