Here's what the Fed's recent move means for your finances
The Fed's recent decision to maintain interest rates at 5.5% brings little relief to households grappling with escalating borrowing expenses.
The Fed has hiked rates 11 times in just 18 months, pushing the key interest rate to its highest level in more than two decades. While the central bank decided to hold rates steady at its September meeting, policymakers still anticipate one more hike before the start of 2024.
This unrelenting trajectory has raised concerns about the financial well-being of consumers who are now paying more for credit cards, auto loans, student loans, and mortgages. All while wage growth lags behind rising prices.
Things are expected to get worse as interest rates peak.
Consumers brace for higher borrowing costs
The Fed’s historic streak of rate hikes dealt the most immediate blow to credit card holders.
Average rates on credit card debt crested over 20%, a near-record high. Yet Americans keep borrowing at a breakneck pace, with cumulative credit card balances hitting a mind-boggling $1 trillion last month.
Experts say that credit card holders shouldn't expect relief anytime soon.
“Even though the Fed chose not to raise rates in September, the truth is that no one should expect credit card interest rates to stop rising anytime soon,” warns Matt Schulz, chief credit analyst at LendingTree. "While we don’t know what the Fed will do going forward, cardholders’ best move is to assume that rates will continue to rise and do what they can to knock their credit card debt."
But credit cards are only the tip of the iceberg.
The Fed's hikes also pushed thirty-year, fixed-rate mortgage rates above 7%, according to Freddie Mac's chief economist Sam Khater. Meanwhile, the average HELOC rate has reached 9.12%, the highest in over two decades.
To address this issue, experts emphasize the importance of repaying HELOC debt swiftly, as these loans are no longer a low-cost form of borrowing.
The Fed is also partly to blame for the surge in auto loan rejections this year. Auto loans have become more burdensome due to rising car prices and higher interest rates. The average rate on a five-year new car loan now stands at 7.49%, the highest in 15 years.
And let's not forget student loan holders.
Private student loans often have variable rates that are adjusted based on various benchmarks, including the federal funds rate. And while federal loan rates are set in stone, that doesn't help freshmen whose loans are fixed at peak rates.
A silver lining?
While the Fed doesn't directly control deposit rates, they tend to correlate with changes in the federal funds rate.
Although the Fed raising rates "does make it more expensive to borrow money for large purchases such as a home or a car, we see the benefit come through in interest savings rates for cash,” said Deri Freeman, a certified financial planner with Prudential.
Savings account rates at major retail banks are currently averaging around 0.45%, according to the Federal Deposit Insurance Corp. This doesn’t seem like much, but savers were getting basically nothing for more than a decade when the Fed kept rates at rock bottom.
Top-yielding online savings accounts are even more competitive, offering more than 5%, the highest in over 15 years.
Despite these attractive options, industry research shows that only one in five savers earn 3% or more on their accounts.
According to Santander Bank, 68% of middle-income Americans have not moved money into high-yield savings accounts despite ongoing concerns about inflation and personal finances.
Americans could certainly use risk-free money in their savings accounts. According to the Fed, total consumer credit rose by $10.4 billion in July, bringing their total amassed debt to $4.98 trillion.