Sep. 20, 2023, the Federal Reserve’s decision to pause rate hikes will give savers and borrowers a break from rising interest rates — but low rates won’t be on the Fed’s radar anytime soon.
After 11 rate hikes in 16 months, the central bank appears poised to cut interest rates for a while, but has not ruled out further hikes in the coming month.
The central bank controls one interest rate: the federal funds rate, which short-term banks use to borrow money from each other. Fed interest rate decisions filter through the financial world, affecting every aspect of borrowing costs and savings rates.
Interest rate management is a monetary tool used by the central bank to:
Slow the economy by raising interest rates in an attempt to control rising costs (hyperinflation) as measured by the Consumer Price Index.
Aid recovery at the opposite end of the economic cycle by lowering interest rates to inject liquidity into the financial system.
Allow past moves to take root while the central bank considers future actions by holding rates steady.
What the central bank says is ahead of interest rates
In a statement released following the announcement of a pause in rate hikes, the central bank said, “Recent indicators suggest that economic activity is expanding at a solid pace. Job gains have slowed in recent months, but the unemployment rate remains strong. Low.”
That sounds like good news, but in the world of monetary policy, it isn’t. A stronger economy can fuel higher consumer prices and the Fed says “inflation is picking up.”
Keeping interest rates high is an attempt to reduce inflation.
“Tighter credit conditions for households and businesses could weigh on economic activity, hiring and inflation,” the central bank added.
Here’s how central bank actions can affect your loans and accounts.
How the Fee Hike Suspension Affects Checking and Savings Accounts
Your short-term liquidity depends on cash in the bank. For years, that meant Americans were treading water with hard-earned money. As interest rates have risen, so have deposit account rates. The Federal Reserve’s interest rate freeze will keep deposit rates close to their current levels.
Paying interest gives very little return. But you need quick access to money, and if you manage your cash flow, the bank won’t have the money in its hands for long.
As of September 2022, interest-earning checking accounts paid a national average of 0.04% monthly. A year later, that rate rose to 0.07%. On a scale of “not very interested” measured in basis points, it ranges from a little to a little.
Let’s raise the interest-paid rate for cash.
It is better to keep short term to interim money in savings account. This is part of your Easy, Easy Money Strategy. Last year, in September, the average monthly interest rate on a traditional savings account at a brick-and-mortar bank was 0.17%. It will be 0.45% in September 2023.
Pay high – Yahoo Finance looks at high-yield savings accounts with APYs of 5% or more. (. Compounding periods vary by bank.) Rates are always close to 6% – a great reason to open an account.
Money Market Accounts
A money market account often increases your earnings over a typical checking account, but you may need to deposit $10,000 to $100,000 to top it up.
The national average monthly interest rate last September was 0.18%. After one year, it is 0.65%. In a decimal world, that’s a big jump. And remember, that’s an average. Consider putting your second layer of money into an above-average money market account. This is money you want to keep on hand, but not checking account.
To do that, a . As the Federal Reserve keeps interest rates where they are, high-yielding money market accounts remain inflated. Again, Yahoo Finance sees high-yield interest rates of just over 5%.
What to do now: Shopping rates at banks, both brick and mortar and online. Keep your almost cash active and get the best rate. Any future Fed rate hike should be a reminder to keep your eye on improving deposit rates.
What does central bank policy do to CDs?
This year has brought good news for CDs. Certificates of Deposits gained higher as the central bank raised rates.
A 12-month CD due September 2022 earned 0.60% monthly interest. Then a bucket rate is raised, with the same term CD paying 1.76%. Already topped out at 5% APY. Your minimum deposit and tenure will determine your rate.
Consider surfing the rising tide of interest rates.
What to do now: Earn interest on your interim money using CDs. Staggering maturities, along with the ladder strategy mentioned above, allow you the flexibility to benefit from higher interest rates and access your money without locking it up for years.
What Recent Federal Reserve Action Means for Loans and Mortgages
Now for the other side of the asset/liability ledger. As higher interest rates are affected by the tightening of the money supply by the Federal Reserve, you will have to pay lenders more to borrow money.
Interest rates have risen to 11.48% in May 2023 from 9.39% at the start of the central bank’s rate hikes in March 2022. That uptrend is expected to continue until monetary policy officials believe the fight against inflation will be successful.
And repayment amounts are rising again for those who still owe student loans. Most federal loans have fixed interest rates, so central bank policy doesn’t affect them. Private student loans can have variable rates, and central bank rate hikes can be a factor.
Contact your lender or loan servicer to find out the interest rate on an existing loan.
The Biden administration’s latest plan, Save ITR, would allow lower rates for those who qualify as the program rolls out. More than 800,000 borrowers have been notified of loan forgiveness associated with income-driven repayment plans.
Home mortgage loans
If you’ve been around for the last couple of years, you know this story. Home loan rates have gone up. According to Fredi Mac, when the Fed started hiking, lenders priced 30-year fixed-rate mortgages as low as 4%. After hitting a peak of 7% last October, home loan interest rates eased slightly, but have since bubbled back up.
The central bank does not directly affect current mortgage rates, which are a function of lenders monitoring the financial markets. However, if high inflation continues to moderate, home loan rates will soon follow suit. It won’t be a diamond-studded descent. It took nearly 20 years for mortgage rates to fall from 7% in 2001 to under 3% in 2020. And homebuyers won’t be able to revisit lenders’ pricey home loan rates anytime soon. The 50-year average for a 30-year fixed-rate mortgage is more than 7%.
What to do now: Carefully consider taking on additional debt as interest rates are elevated. If you’re starting a new loan, budget your monthly payments so that the rates stay mostly constant. If interest rates are low and refinancing is available, it can be a welcome budget surprise.
How Fed rate hikes affect credit cards
While the Fed’s fight against inflation has eased the rise in consumer prices, the Fed’s past rate hikes have also affected your credit card debt — and not in a good way.
Credit card interest rates have moved from an average of 16.65% to more than 22% during the Federal Reserve’s recent rate hike cycle. As long as monetary policy remains firm, there is no doubt that APR interest rates on credit cards will remain high.
That means unless you pay off your cards every billing cycle, minimum payments won’t be easy and credit card balances will incur hefty interest charges.
What to do now: Prioritize paying off credit cards you can — especially those with high interest fees — and consider balance transfers for low-interest rate and zero-interest credit card offers as your credit score allows. With good credit, a foreclosure may be another option to consider.
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