How Skipping Rate Hike Could Impact You: Insights from The Federal Reserve

The Federal Reserve is expected to forgo an increase in interest rates during its upcoming meeting, according to industry experts. However, this may not bring any relief to consumers.

Since last year, the central bank has raised interest rates 11 times, marking the most rapid pace of tightening since the early 1980s.

Despite this, recent data presents a mixed outlook for the economy. While overall growth remains stable due to continued consumer spending, the labor market is starting to loosen from its historically tight conditions.

Additionally, inflation, although showing signs of cooling, is still significantly above the Fed’s 2% target.

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Even with a pause in rate hikes, Greg McBride, chief financial analyst at Bankrate.com, emphasizes that “the one thing that remains very clear is that the Fed is nowhere close to cutting rates”. He adds, “Rates remain really high and will stay there for a while.”

The federal funds rate, which is set by the U.S. central bank, determines the interest rate at which banks borrow and lend to each other overnight. While consumers do not directly pay this rate, the Fed’s actions still impact the borrowing and savings rates they encounter on a daily basis.

Let’s delve into the impact that has already been felt:

Most credit cards have variable rates, which are directly linked to the Fed’s benchmark rate.

As a result of previous rate hikes, the average credit card rate now exceeds 20% — reaching an all-time high. Furthermore, balances have increased, and nearly half of credit card holders carry debt from month to month, as indicated by an earlier report from Bankrate.

Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, inflation and the Fed’s policy decisions have diminished the purchasing power of potential homebuyers.

Freddie Mac’s chief economist, Sam Khater, states that “the average rates for a 30-year, fixed-rate mortgage remain anchored north of 7%”. He adds, “The reacceleration of inflation and strength in the economy is keeping mortgage rates elevated.”

Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are tied to the prime rate. As the federal funds rate has risen, so has the prime rate, causing these rates to increase as well.

Currently, the average rate for a HELOC has reached 9.12% — the highest in 22 years according to Bankrate. Greg McBride notes, “That HELOC is no longer low-cost debt and it warrants a much higher focus on repayment than it has for a long time.”

Although auto loans have fixed rates, the rising prices of cars and increased interest rates on new loans have led to larger payments for consumers.

The average rate for a five-year new car loan has now climbed to 7.46%, the highest in 15 years, according to Bankrate.

Experts suggest that consumers with higher credit scores may be able to secure better loan terms or find better deals by shopping around. In fact, a recent LendingTree report reveals that car buyers could save an average of $5,198 by choosing the offer with the lowest annual percentage rate (APR) over the one with the highest.

Federal student loan rates are fixed, resulting in minimal immediate impact on most borrowers due to the Fed’s actions. However, undergraduate students who take out new direct federal student loans are now paying 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.

Existing borrowers are now experiencing interest accruing once again as of September 1. In October, millions of borrowers will make their first student loan payment after a three-year pause.

Private student loans typically have variable rates tied to Libor, prime, or Treasury bill rates, resulting in these borrowers already paying more in interest. However, the amount of additional interest varies depending on the benchmark.

Although the Fed does not have direct influence over deposit rates, they tend to be correlated with changes in the target federal funds rate. According to the Federal Deposit Insurance Corp. (FDIC), savings account rates at some major retail banks have risen to an average of 0.43%.

While average rates have increased significantly over the past year, they are still relatively low compared to online rates. Ken Tumin, founder of DepositAccounts.com, notes that top-yielding online savings account rates are now exceeding 5%, the highest rate savers have seen in over 15 years.

However, if the Fed decides to skip a rate hike during its September meeting, the pace of deposit rate increases is likely to slow down, according to Tumin.

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