The Federal Reserve chose to postpone further rate cuts for the time being and maintain interest rates at its initial meeting of the year, allowing officials to evaluate whether inflation is decreasing and the potential effects of President Donald Trump’s policies on the U.S. economy.
The decision indicates that the Federal Open Market Committee (FOMC) will maintain its benchmark federal funds rate at 4.25-4.5 percent, a target range last observed in early 2023. Before that, rates had not reached this level since 2007. Interest rates on various consumer borrowing costs—including credit cards, car loans, home equity lines of credit (HELOCs), and adjustable-rate mortgages—are expected to remain stable in the upcoming weeks. Conversely, savers can still benefit from the highest returns in more than ten years by placing their money in a high-yield savings account.
The U.S. central bank has reduced interest rates by a full percentage point from a 23-year peak of 5.25-5.5 percent. Officials initiated the lower-rate phase with a substantial half-point reduction in September, concerned that the job market was slowing down too rapidly. Inflation appeared to be gradually decreasing, retreating to 2.4 percent year-over-year after reaching a peak of 9.1 percent in June 2022.
Economic data has now been updated, indicating that the financial system hasn’t decelerated as much as was previously stated. Inflation has risen as well, closing out 2024 at an annual rate of 2.9 percent—about the same level it started the year at. Following the announcement of the Fed’s third consecutive interest rate cut in December, Fed Chair Jerome Powell stated that officials intended to proceed “more carefully” in the upcoming year. They believe the labor market doesn’t require further slowing to meet their inflation targets, yet they also feel there’s no urgency to quickly lower interest rates.
Powell stated
From the sidelines, Fed officials will be seeking to obtain greater assurance that inflation is easing. Powell stated that they will be keeping an eye on Trump’s proposals for tougher immigration, deportations, tax reductions, and tariffs. Economists polled by Bankrate indicate that such policies could potentially revive inflation and stimulate the U.S. financial sector, although increased import duties might negatively impact growth if other nations retaliate. Powell also mentioned that he has not spoken with Trump yet, just days after the president said he would “demand that interest rates be lowered right away.”
“The committee is definitely in a state of awaiting the implementation of policies,” Powell remarked. “We must allow those policies to be defined before we can start to make a reasonable evaluation of their economic implications.”
Currently, the message to consumers is obvious: Interest rates are not decreasing as rapidly as they rose. Keep reducing high-interest credit card debt, evaluate proposals from various lenders if you must borrow at this moment, and think about refinancing if a chance to save money arises.
What does it mean when the Fed changes interest rates
Savers
Savers have become the obvious victors in today’s high-interest environment — particularly if they are placing their funds in a spot that offers returns. Yields are at their highest level in more than ten years and sustained elevated interest rates suggest they will probably remain so.
The top savings account available today is offering an annual percentage yield (APY) of 4.75 percent, significantly exceeding the current inflation rate of 2.9 percent, as reported by the Bureau of Labor Statistics consumer price index. This time last year, Bankrate’s 2024 Interest Rate Forecast anticipated that the top market offers would have decreased to 4.45 percent.
Inflation is decelerating, yet advancement toward 2% has come to a standstill.
In December, prices increased by 2.9% compared to a year earlier, accelerating from last month’s annual rate of 2.7% and a 2.4% rate in September.
Returns on certificates of deposits (CDs) are similarly high. The highest-yielding five-year CD is now providing a 4.25 percent APY. The top 2-year CD rate available has increased slightly in recent weeks, climbing from 4.2 percent at the year’s beginning to 4.4 percent. CD yields are set, which means they remain unchanged until maturity — regardless of whether the Fed lowers interest rates. Even better, they include insurance from the Federal Deposit Insurance Corporation (FDIC), allowing Americans to achieve a market-like return with no risk involved.
Nonetheless, not every depositor is enjoying the advantages of a high-rate period. Interest rates on savings accounts at major banks like Chase and Bank of America remain unchanged today compared to when the Fed’s main rate was nearly zero, staying between 0.01-0.05 percent APY.
Borrowers
For the Americans standing by for interest rates to decrease, the rate cuts from last year probably haven’t changed much. Car loans, credit card rates, and HELOCs have all decreased slightly, yet they’re still close to the highest rates seen in more than ten years, based on interest rate information monitored by Bankrate. In the meantime, many financing rates available to consumers in the market have not decreased as significantly as the Fed’s main interest rate.
Undoubtedly, unsecured credit card debt is always too high to be manageable. The typical credit card rate remained over 16 percent while interest rates were close to zero. Currently, they remain over 20 percent, according to Bankrate data.
If you’re looking to reduce your credit card debt, Bankrate’s ratings of the top balance-transfer cards now offer Americans an initial 0 percent annual percentage rate (APR) for up to 21 months. This means you can pay down your balance without incurring any interest — aiding you in speeding up your debt repayment. Transferring your balance, though, incurs a fee, typically ranging from 3 to 5 percent of the overall debt you transfer.
Borrowers may also feel inclined to attempt to time the market, postponing significant purchases in the expectation that interest rates will eventually decrease.
homebuyers & Homeowners
Homebuyers hoping for reduced mortgage rates have been greatly let down. The Fed’s interest rate reductions have not succeeded in lowering the historically elevated mortgage rates. The national average rate for a 30-year fixed mortgage has remained above 7 percent throughout most of January, increasing by 86 basis points since the Fed’s initial rate cut in September. Upcoming rate cuts from the Fed may not necessarily offer significant assistance, as longer-term interest rates tend to closely follow the 10-year Treasury yield.
In November, home prices reached yet another record peak, but the rate of price increases has decelerated, as indicated by the most recent data from S&P CoreLogic’s Case-Shiller Home Index. This trend may have persisted in December, as the most recent data from the National Association of Realtors (NAR) indicates that existing home sale prices reached another peak for the month.
Elevated mortgage rates were considered to be excessively high. As they continue to remain elevated for a longer period, a new question arises: Could this become the new normal?
The housing market has cooled — at least to some extent — from its extremely active pandemic-era condition. Five years ago, houses were being sold before they even hit the market; sellers were being courted by all-cash purchasers, while Americans looking to buy found themselves caught in bidding wars.
Supply is improving slightly, and homes are remaining on the market for a bit longer. As of December, the National Association of Realtors (NAR) reports that the housing market has a supply of homes available for 3.3 months.
Supply continues to stay low (a balanced market is believed to have 5-to-6 months of inventory) but shows significant improvement from a minimum of only 1.6 months in January 2022.
Mortgage rates are likely to remain high until a more definite route to reduced inflation is established. Yet, attempting to time the market can be a foolish endeavor. Americans who locate a home within their budget may miss the opportunity if they keep waiting for lower rates that may never arrive.
In the meantime, if you remain unable to afford the housing market, seize opportunities that may assist in preparing you for future home ownership. These consist of enhancing your savings and earnings, in addition to reducing debt.
Investors
Since President Donald Trump’s inauguration, it has been a story of two financial markets. On the one hand, the possibility of reduced taxes and relaxed regulations has energized investors, with the S&P 500 rising over 5 percent since early November. Conversely, Treasury markets have experienced a significant decline, as investors prepare for tariffs and tougher immigration policies that could lead to increased inflation.
The surge in artificial intelligence (AI) experienced a temporary pause on Monday when reports of a competitor from China caused tech stocks to drop amid worries that the U.S. might not be leading in the competition as previously believed.
However, don’t worry about the daily bogeyman if you’re investing for the long term. Meaningful purchasing opportunities may arise when markets are declining, and altering your approach due to daily variations could potentially cement a loss.
Written by: S. Foster Contact