Alicia Levin, head of investment strategy at BNY Mellon Wealth Management, talks about “How to Make Money” and what it will take for the Fed to raise interest rates.
The US Federal Reserve signaled at the end of its two-day meeting on Wednesday that interest rates will remain high for some time, ending the era of ultra-cheap money.
Americans will be forced to adjust to a new normal of higher debt payments on everything from credit cards to mortgages and student loans, while savers will benefit from higher interest rates. right.
“The timing of when the Fed will start cutting interest rates is undetermined, and it’s an indefinite holding pattern,” said Greg McBride, chief financial analyst at Bankrate.
Policymakers voted at the policy meeting as follows: keep interest rates unchanged But officials have also signaled they are unlikely to cut rates anytime soon as signs of inflation persist, meaning borrowing remains much more expensive than it was just four years ago. are doing. .
Fed leaves interest rates unchanged as inflation casts doubt on future rate cuts
Federal Reserve Chairman Jerome Powell holds a press conference at the end of a two-day Federal Open Market Committee (FOMC) meeting at the Federal Reserve Board in Washington, DC, March 20, 2024. (Photo by Mandel Gunn/AFP via Getty Images/Getty Images)
For Americans who carry balances from one month to the next, the new era of high interest rates can cost them hundreds or even thousands of dollars.
Although the federal funds rate is not paid directly by consumers, it does affect the cost of borrowing, such as mortgages, auto loans, and mortgages. credit card. Rising interest rates have pushed the average interest rate on a 30-year mortgage above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit to auto loans and credit cards have also skyrocketed.
in fact, housing affordability Thanks to astronomical rises in mortgage rates, the situation is as bad today as it was at the peak of the housing bubble in 2008.
of Atlanta Fed Home Price MonitorThe index compares median home prices and other housing costs to median household income, and as of February, the median U.S. household needed about 39.8 of their income to buy a median-priced home, according to the index. It is shown that it is necessary to spend %. Although this has improved since the end of 2023, it is still far below typical pre-pandemic levels.
Americans with credit card debt are also feeling the pinch from rising interest rates.
The average interest rate on credit cards has already increased to 20.66% as of Wednesday, from 16% in February 2022, before the Fed started raising rates, according to Bankrate’s database.
Even small changes in credit card interest rates can affect how much Americans owe.
The horrors of stagflation return with a vengeance
For example, if the average American borrows $5,000, at current APR levels, it would take approximately 277 months and $7,723 in interest to pay off the debt with minimum payments. By comparison, if interest rates were lower, it would have taken him 269 months and $6,126 to pay off the same amount of debt.
Thanks to the Fed’s policy stance of raising long-term interest rates, these rates are unlikely to fall significantly any time soon.
“The mantra of “higher interest rates for the long run” is music to the ears of savers who, for now, continue to enjoy above-inflation returns in safe deposit accounts, money markets, and CDs, McBride said. . “But for borrowers, it dashes their hopes that interest rates will be meaningfully lowered anytime soon.”
Pedestrians pass the Federal Reserve Building on June 3, 2023 in Washington, DC. (Nathan Howard/Bloomberg/Getty Images)
However, there is a silver lining to the rate increases for many consumers.
largely banks and credit unions When interest rates go up, savings rates also go up, giving some Americans, especially retirees living off their savings, an opportunity to earn more.
According to Bankrate, as of May 1, the national average bank savings rate reached 0.58%, but some of the largest banks in the U.S. offer interest rates as low as 0.01%.
CLICK HERE TO GET FOX BUSINESS ON THE GO
There is another, much more advantageous option. Many high-yield savings accounts currently pay between 4.2% and 5.27%, providing options for consumers looking for lower-risk returns. Savers can open a high-yield savings account online, but they should check to see if the bank is insured by the Federal Deposit Insurance Corporation.
Savings accounts are currently available at more than 20 FDIC-insured banks nationwide, with interest rates of 3.75% or higher, according to Bankrate.
