The Federal Reserve ended its streak of 10 consecutive interest rate hikes on Wednesday deciding to keep rates steady. Even so, consumers may not feel celebratory as they reel from the earlier aggressive rate increases.
Any pause should be welcomed by consumers, but for many, damage has already been done. Two in 5 people say Fed rate hikes are forcing them into more debt rather than forcing them to pay off debt, according to an online WalletHub survey taken May 29 through June 2. More than 25% of respondents said their jobs are at risk if the Fed continues to raise rates, and 44% are upset about prospects of more rate increases.
Consumers already will pay around $33.4 billion in extra interest charges over the next 12 months due to the Fed’s 500 basis points in rate hikes between March 2022 and May 2023, WalletHub said. In part due to inflation and high interest rates, total household debt in the first three months of the year increased by $148 billion to $17.05 trillion, and the share of current debt becoming delinquent increased for most debt types, according to the New York Federal Reserve.
Without an increase, the short-term benchmark fed funds target range remains between 5% and 5.25%, the highest level since 2006 and up from near zero at the start of 2021 after the fastest pace of tightening since the early 1980s. The fed funds rate is above the consumer inflation rate, which some economists have said is necessary to slow the economy enough to curb inflation, but some say with 4% annual inflation in May still twice the Fed's 2% goal, another rate hike may be in the cards later this summer.
The Fed signaled two more increases are likely this year as officials continue to fight high inflation.
“Whether the Fed raises interest rates further or not, borrowing costs are the highest in years,” said Greg McBride, Bankrate’s chief financial analyst. “Paying down high cost, variable rate debt is an urgent priority for households.”
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Likely, no. The average APR on a new credit card offer is 23.98%, the highest in decades, said Matt Schulz, LendingTree's chief credit analyst, adding that “they’re probably going to still creep higher,” despite the Fed's decision not to raise rates in June.
For those holding credit cards, the 20.92% average annual percentage rate is the highest since the Fed began tracking that data in 1994 and will likely rise further.
The higher rates will mean it may cost people still more and take a little longer to pay off credit card debt, but the goal should always be to do so, LendingTree's Schulz said.
“Zero percent balance transfer credit cards are an incredibly powerful weapon in your battle against credit card debt,” Schulz said. “They’re still widely available for those with good credit and can allow you to go up to 21 months without accruing any interest. That’s a really big deal.”
Consumers can also call their credit card companies and ask for an interest rate reduction. More than three-quarters of cardholders who asked for a lower APR for their credit card in the past year got one, according to an April report from LendingTree. The average reduction was about 6 percentage points, which could save you $500 or more depending on how much you owe, it said.
Homeowners with existing fixed-rate mortgages won’t see any changes. Recent and prospective homebuyers are feeling the higher rates, but notably, mortgage rates have been volatile. The average rate on a 30-year, fixed mortgage reported by Freddie Mac has fallen to as low as 6.09% in early February and climbed as high as 6.79% in early June.
The Fed influences but doesn’t directly set mortgage rates, so home loan costs may not decrease with a pause. Other factors, like housing demand and economic outlook, also affect mortgage rates. “Given how steep rates are and how persistently high home prices have remained in many parts of the country, mortgage demand is low,” said Jacob Channel, LendingTree senior economist. “It’ll likely stay low until rates and home prices show more significant and sustained declines.”
It's important to note that while mortgage rates may not rise significantly, they’re still relatively steep. The national average monthly payment on a new mortgage is $2,317, LendingTree data show.
For a $350,000 loan at the June 1 rate of 6.79%, borrowers would pay about $2,279 monthly. That’s an extra $381 a month, an extra $4,572 a year and an extra $137,160 over the 30-year lifetime of the loan compared to a year ago when rates were 1.7 percentage points lower.
As the availability of cars grows following an easing of supply chain issues, interest rates are now the main culprit hampering vehicle sales, said Jessica Caldwell, Edmunds' executive director of insights.
The average APR on newly financed vehicles in the first three months of the year climbed to 7%, compared with 4.4% a year earlier. That rate is the highest Edmunds has on record going back to the start of 2008. Meanwhile, the average monthly payment for a new vehicle hit a record $730, up from $656 a year earlier. And a record high 16.8% of consumers financed a new vehicle with a monthly payment of $1,000 or more, Edmunds said.
To lower monthly payments, car shoppers can increase their down payments. The average down payment for a new vehicle climbed to a record of $6,956 in the first three months, Edmunds said.
Those who can afford to shorten the term of their loans also did so to take advantage of lower APRs. A record 12.3% of consumers opted for 36- or 48-month loan terms, though most people extended loan terms out as much as possible to increase affordability.
The dual fear of high inflation and recession (or stagflation) has kept stocks under wraps, until lately. The benchmark broad market Standard & Poor’s 500 index and the tech-heavy Nasdaq each rallied to the highest levels since April 2022 on signs inflation’s cooling enough that the Fed would pause rate hikes.
Higher rates make borrowing and business investment more expensive, and they cool consumer spending, which cuts into corporate profits. Some investors are optimistic because recent corporate earnings have not been as bad as predicted. Companies’ profits could expand again once the Fed stops raising rates.
“Overall, this could be short-term relief and a positive for stocks, but you have to factor in so many other things, like economic growth, trade, earnings,” said Anip Patel, founder of CaPatel Investments, which invests in South Asian entrepreneurs.
With uncertainties like whether the Fed is finished raising rates or just taking a break still lurking, Patel said not all sectors may benefit equally. Investors should remain cautious of interest-rate sensitive sectors like real estate and utilities, but the key, as usual, is to be diversified. “Do not put all your eggs in the same basket,” he warned.
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For savers, yields have risen on online savings accounts and online 1-year CDs to the highest they’ve been in more than a decade, but gains are slowing and they’re facing tough competition.
“Consumers now have several options to earn over 5% yield on their cash,” said Ken Tumin, founder of DepositAccounts.com, which tracks depository banking products.
Several money market funds now yield between 5.00% and 5.25%, much higher than the average online savings account of 3.98% and the average online 1-year CD of 4.86%. Competition from money market funds is pushing online banks to increase their rates, with a few now offering 5.00%-plus. The highest online savings account yield is 5.25%.
The average online 5-year CD yield is 3.86%, down from 4.04% on January 1 but up from 2.53% one year ago.
In comparison, brick-and-mortar bank deposit rates continue to move higher at a snail’s pace. The average savings account yield only gained 11 basis points in 2023, rising to 0.39% from 0.28%.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday.
This article originally appeared on USA TODAY: The Fed paused rate hikes. Does it matter?
