Gabriela Santos, chief market strategist at JPMorgan Asset Management, analyzes the Fed’s decision-making on “Clamant Countdown.”
The Federal Reserve signaled at the end of its two-day meeting on Wednesday that interest rates will remain high for some time and that Americans will be forced to adjust to the reality that borrowing money is much more expensive than before.
In this new era of high-interest rates, savers could see big gains from low-risk investments like Treasury bonds, but borrowers will face tougher debt payments on everything from credit cards to mortgages to student loans.
Policymakers vote during the meeting, hold interest rates It is set to fall in the 5.25% to 5.5% range, the highest since 2001. But officials also signaled that interest rates are unlikely to fall significantly in the near future because of persistently high inflation, meaning borrowing costs will remain much higher than they were just four years ago.
Federal Reserve Chairman Jerome Powell held a press conference on March 20 at the end of a two-day Federal Open Market Committee meeting at the Federal Reserve Bank of Washington, DC. (Mandel Ngan/AFP via Getty Images/Getty Images)
For Americans who carry their balances over to the next month, this new era of high interest rates could cost them hundreds, even thousands, of dollars.
The federal funds rate is not paid directly by consumers, but it affects the costs of borrowing money, including mortgages and auto loans. credit cardRising interest rates have pushed the average rate on a 30-year mortgage above 7% for the first time in several years.
in fact, Ease of buying a home Astronomical increases in mortgage interest rates have left the housing market as bad as it was at the peak of the 2008 housing bubble.
of Atlanta Fed Home Affordability MonitorThe study, which compares median home prices and other housing costs to median household income, shows that U.S. households would need to spend about 41.7% of their income to buy a median-priced home as of March. That’s an improvement from late 2023, when home affordability hit a nearly two-decade low, but it’s still far worse than typical pre-pandemic levels.
Americans with credit card debt are also feeling the hit from rising interest rates: The average interest rate on a credit card has already skyrocketed to a near-record 20.67% as of Wednesday, from 16% in February 2022, before the Fed began raising rates, according to Bankrate’s database.
Fed keeps interest rates at 23-year high, expected to cut only once this year
Even small changes in credit card interest rates can affect how much debt Americans owe.
Fears of stagflation return with vigor
For example, if the average American owes $5,000, at current APR levels it would take about 277 months and $7,723 in interest to pay off the debt with minimum payments. By comparison, if interest rates were lower, it would take 269 months and $6,126 to pay off the same amount of debt.
Given the Fed’s high-for-long interest rate policy stance, these rates are unlikely to fall significantly anytime soon.
“Interest rates are unlikely to fall quickly enough, or fast enough, to provide substantial relief to borrowers,” says Greg McBride, chief financial analyst at Bankrate. “Take advantage of zero percent credit card balance transfer offers, look for lower fixed-rate personal loans or mortgages, and put as much of your income towards paying off this debt as quickly as possible.”
Pedestrians pass by the Federal Reserve Bank Building in Washington, DC on June 3, 2023. (Nathan Howard/Bloomberg/Getty Images)
But for many consumers, rising interest rates also have a bright side.
largely Banks and Credit Unions A period of rising interest rates can provide a good opportunity for some Americans, especially retirees who are living off their savings, to boost their savings rate and increase their income.
According to Bankrate, the national average bank savings rate reached 0.58% as of June 3, but was as low as 0.01% at some of the largest U.S. banks.
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There’s another, much more lucrative option: high-yield savings accounts. Many currently offer yields between 4.2% and 5.3%, making them an option for consumers looking for a low-risk return. Savers can open a high-yield savings account online, but they should make sure the bank is insured by the Federal Deposit Insurance Corporation (FDIC).
According to Bankrate, there are currently more than 20 savings and money market savings accounts offered by FDIC-insured banks nationwide that offer interest rates of 3.75% or higher.
