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The Federal Reserve is anticipated to maintain its current interest rates following its two-day meeting next week, even in the wake of comments from former President Donald Trump, who stated he would “demand that interest rates drop immediately.”
The central bank has been cautious in adjusting its policy after implementing a significant increase of 5.25 percentage points from 2022 to 2023, aimed at combating persistent inflation that continues to exceed the Fed’s target of 2%. While on the campaign trail, Trump highlighted how inflation and elevated interest rates are severely impacting the economy.
As consumers grapple with the pressures of high prices and borrowing costs, immediate relief appears unlikely.
“Anyone expecting the Fed to swoop in and alleviate the burden of high interest rates soon will likely be disappointed,” remarked Matt Schulz, chief credit analyst at LendingTree.
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The Federal funds rate, established by the U.S. central bank, is the rate at which banks lend to each other overnight. While this rate does not directly reflect what consumers pay, shifts made by the Fed influence the overall borrowing and savings rates that individuals encounter regularly.
When the Fed eventually reduces the funds rate, consumers might notice a decline in borrowing costs for various loans, including mortgages, auto loans, and credit cards, which could ease financial pressure.
Credit Cards
Most credit cards operate on a variable rate, closely linked to the Fed’s benchmark rate. Nonetheless, even after the central bank lowered its benchmark rate by a full percentage point last year, credit card interest rates have remained high.
Credit card issuers often take a more gradual approach in adjusting rates in response to Fed changes, according to Greg McBride, chief financial analyst at Bankrate.
Presently, the average credit card interest rate stands at over 20%, which is near an all-time high. Meanwhile, the rate of delinquencies is climbing, and a recent report from the Philadelphia Federal Reserve indicated that the proportion of cardholders making only minimum payments has surged to a 12-year peak.
“Now more than ever, addressing high-interest debt is crucial,” mentioned Schulz.
Mortgage Rates
Despite the Fed’s rate cuts, mortgage rates have increased in recent weeks.
Since 15- and 30-year mortgage rates are typically fixed and largely tied to Treasury yields and overall economic conditions, they do not decline proportionately with Fed policies. Most homeowners have fixed-rate mortgages, meaning their rates remain unchanged until they refinance or sell and purchase another property, further complicating the housing market.
“Most mortgage debt is fixed, so current homeowners are not directly affected,” highlighted McBride. “This scenario exacerbates affordability challenges for prospective homebuyers and has led to stagnation in home sales.”
The current average rate for a 30-year fixed-rate mortgage is 7.06%, as estimated by Bankrate.
Auto Loans
Auto loan rates are also fixed, contributing to one of the fastest-growing forms of consumer credit outside of mortgages. Rising vehicle prices have pushed monthly payments higher, resulting in total outstanding auto loan debt exceeding $1.64 trillion.
The average interest rate on a five-year new car loan currently hovers around 7.47%, according to Bankrate.
“With the Fed indicating any rate cuts will be gradual in 2025, challenges in affordability are likely to persist for many new car buyers,” noted Joseph Yoon, consumer insights analyst at Edmunds.
“Although some rate reductions could occur in 2025, the ongoing rise in vehicle prices hampers expectations for meaningful improvements in affordability for consumers next year,” Yoon added.
Student Loans
Federal student loan interest rates are fixed, meaning changes in the Fed’s policy do not have immediate ramifications for most borrowers.
Nonetheless, undergraduates who took out direct federal student loans for the 2024-25 academic year are facing a rate of 6.53%, a marked increase from 5.50% last year. Future rates will be influenced partly by the outcome of the May auction of the 10-year Treasury note.
In contrast, private student loans often feature variable rates linked to benchmarks such as the prime rate or Treasury bill, causing these borrowers to encounter higher interest payments that fluctuate with the market.
Savings Rates
While the Fed does not directly dictate deposit rates, savings yields generally correlate with the target federal funds rate.
The series of interest rate hikes by the Fed in recent years has enabled top-yielding online savings accounts to offer returns that have not been seen in over a decade, with yields currently approaching 5%, as stated by McBride.
“One positive aspect of the Fed remaining on the sidelines is that savers can continue to benefit from these inflation-beating yields for the foreseeable future,” McBride observed.
Source
www.cnbc.com