The Federal Reserve’s decision on Nov. 1, 2023, to continue pausing rate hikes will give savers and borrowers an extended break from interest rates rising further — but the Fed is still keeping its options open.
Make no mistake, interest rates remain elevated.
And the central bank maintains that an additional rate increase is possible in the months ahead.
How monetary policy works
The Fed controls one interest rate: the federal funds rate, which is the short-term rate banks use to borrow from each other. Fed interest rate decisions filter through the financial world, impacting virtually every facet of borrowing costs and saving rates.
Interest rate management is monetary medicine the Fed uses to:
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Slow the economy by raising interest rates in an effort to tame rising costs (high inflation) as measured by the consumer price index.
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Help mount a recovery when we’re at the opposite end of an economic cycle by lowering interest rates as an injection of liquidity into the financial system.
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Allow past moves to take root while the Fed considers future actions by holding rates steady.
What the Fed says is ahead for interest rates
In a statement issued following the announcement of another pause in rate hikes, the Fed said that “economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low.”
That all sounds like good news, but the Fed added the caveat: “inflation remains elevated.” A strong economy can fuel higher consumer prices and the Fed says it would “assess additional information” in determining “the extent of additional policy firming …”
That’s Fed speak for keeping a future rate hike on the table.
Here’s how the Fed’s actions could trickle down to your loans and accounts.
How a rate-hike pause affects checking and savings accounts
Your short-term liquidity depends on money in the bank. For years, that has meant Americans treading water as cash earned next to nothing. As interest rates have risen, so have deposit account rates. The continuing pause in interest rate increases by the Federal Reserve will likely keep deposit account rates near their current level.
Checking accounts
Checking accounts that pay interest offer the most meager returns. But you need quick access to the money, and if you manage your cash flow, the bank won’t have most of that money in its hands for long.
Interest-earning checking accounts paid a national average of 0.04% monthly in October 2022. A year later, that rate had risen to 0.07%. On a scale of “not much interest” measured in basis points, that’s from a smidge to a tad.
Let’s move up the interest-paid-for-cash scale.
Savings accounts
Short to mid-term money is best parked in a savings account. It’s part of your easy-in, easy-out cash strategy. Last year, in October, the monthly average interest rate on a traditional savings account at a brick-and-mortar bank was 0.21%. In October 2023 it was 0.46%.
High-yield savings accounts pay more — Yahoo Finance is seeing high-yield savings account APYs of 5% or more. (APY is the result of compounding your interest rate. Compounding periods can vary by bank.)
Money market accounts
A money market account often boosts your return from a common checking account, but you’ll likely need to deposit anywhere from $10,000 to $100,000 to earn the raise.
Last October’s national average monthly interest rate was 0.23%. One year later, it was 0.65%. In a decimal world, that’s a pretty big jump. And remember, that’s an average. Consider putting your second layer of cash in an above-average money market account. It’s the money you want close at hand, but not checking-account close.
To do that, look for a high-yield money market account. As the Federal Reserve holds interest rates where they are, high-yield money market accounts will remain elevated. Again, Yahoo Finance is seeing high-yield interest rates at and slightly over 5%.
What to do now: Shop rates at banks, both brick-and-mortar and online. Keep your near-term cash nimble and earning the best rate it can. Any future Fed rate hike should be a reminder to keep your eye out for improving deposit rates.
What Fed policy does for CDs
This year has brought good news for CDs. As the Fed pushed rates up, certificates of deposit earned more.
A 12-month CD was earning 0.71% monthly interest in October 2022. A bucket of rate hikes later, the same term CD was paying 1.79%. The best CDs are already topping 5.5% APY. Your minimum deposit and term will determine your rate.
Consider a CD ladder to surf the rising wave of interest rates.
What to do now: Use CDs to earn interest on your mid-term money. Staggering maturities, with the ladder strategy mentioned above, will allow you the flexibility to benefit from higher interest rates and access your money without locking it all up for years.
What the latest Federal Reserve move will mean for loans and mortgages
Now to the other side of the asset/liability ledger. Higher interest rates influenced by the Federal Reserve’s tightening of the money supply mean you pay lenders more to borrow.
Personal loans
Interest rates on personal loans have risen from 8.73% at the beginning of the Fed rate hikes in 2022 to 12.17% in August 2023. That higher trend is expected to continue until monetary policy officials believe the fight against inflation is won.
Student loans
With forbearance ending and payments due again, student loans are rising top-of-mind again for those who still owe. Most federal loans have fixed interest rates, so Fed policy doesn’t impact them. Private student loans may have a variable rate, and Fed rate hikes can be a factor.
To learn the interest rate on an existing loan, contact your lender or loan servicer.
The latest plan from the Biden administration, SAVE IDR, could allow lower payments to those who qualify. Over 800,000 borrowers have been notified of loan forgiveness related to income-driven repayment plans.
Meanwhile, interest rates on new student loans are rising.
Home mortgage loans
If you’ve been looking to buy a home in the past two years, you know this story. Home loan rates have soared. When the Fed hikes began, lenders were pricing 30-year fixed-rate mortgages around 4%, according to Freddie Mac. Home loan interest rates rose well above the mid-7% range in October 2023.
The Fed doesn’t directly influence current mortgage rates, they’re a function of lenders tracking financial markets. However, if high inflation continues to ease, it’s likely that home loan rates will soon follow. It won’t be a diamond run descent. It took nearly 20 years for mortgage loan rates to fall from 7% in 2001 to an annual percentage rate under 3% in 2020. And homebuyers may not see lenders price home loan rates that low again anytime soon. The 50-year average for a 30-year fixed-rate mortgage is well over 7%.
What to do now: Carefully consider taking on any additional debt as interest rates remain elevated. If you do initiate a new loan, budget your monthly payment for rates to remain mostly stable. Then if interest rates do head lower and you get a refinancing opportunity, it will be a welcome budget surprise.
How Fed interest rate hikes impact credit cards
While the Fed’s fight against inflation may be easing the rise in consumer prices, the central bank’s past rate increases have impacted your credit card debt, too – and not in a good way.
Credit card interest rates have moved from an average of 16.65% to well over 22% during the Federal Reserve’s latest rate-raising cycle. No doubt, those variable APR interest rate charges on credit cards will remain high as long as the monetary policy holds firm.
That means minimum payments due won’t ease and stiff interest charges on credit card balances will remain unless you pay off your cards each billing cycle.
What to do now: Prioritize paying off the credit cards you can — especially those with the highest interest charges — and consider balance transfers to lower interest rate and zero-interest credit card offers as your credit score allows. With good credit, a personal loan for credit card debt consolidation may be another option to consider.
