The Federal Reserve announced that it’s holding interest rates steady following its April 30-May 1 meeting, leaving the federal funds rate at a target range of 5.25 to 5.5 percent. It’s the seventh time in the last eight meetings that the Fed has left rates unchanged, though the central bank has raised rates a total of 11 times during this economic cycle in an effort to tamp down high inflation.
The Fed’s decision comes as inflation hit 3.5 percent year-over-year in March, after reaching the highest levels in decades at over 9 percent in mid-2022. The last time the Fed raised rates was at its July 2023 meeting. With only one hike in the past eight meetings, consumers should expect rates to eventually decline, though stubbornly high inflation will dictate the timing of any decrease.
“The Federal Reserve will hold interest rates steady until they’re comfortable with the trajectory of inflation,” says Greg McBride, CFA, Bankrate chief financial analyst. “Right now they are not comfortable, as inflation remains elevated and has come in higher than desired in each of the last three months.”
At about 4.65 percent, the 10-year Treasury note has risen substantially from the start of the year, even if it’s down from its 52-week high of 4.99 percent, which was hit in October. The yield plummeted at the end of 2023, but has picked up as Fed officials talked back the timeline in 2024 for lowering rates and the market pushed out its expectations for the move.
“We need to go on a winning streak of seeing inflation trend down over multiple months before the Fed will feel comfortable enough to begin cutting interest rates,” says McBride.
Here are the winners and losers of the Fed’s latest rate decision.
1. Savings accounts and CDs
The Fed’s multi-month pause on adjusting interest rates has meant that many banks have also paused changing rates on their savings, CDs and money market accounts, while many others have been actively paring them back in anticipation of the Fed lowering rates in the future.
“Let the good times roll – for savers at least,” says McBride. “If you’re putting your money in the right places – high-yield savings accounts, money market accounts and CDs – you’re earning returns that are well in excess of inflation and are poised to stay that way for the foreseeable future.”
Savers looking to maximize their earnings from interest should consider turning to online banks or the top credit unions, where rates are typically much better than those offered by traditional banks.
When it comes to CDs, account holders who recently locked in rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.
With rates likely to only fall from here, it may be a good time to lock in longer maturities on CDs, especially those in the 2-year to 5-year timeframe while they remain relatively high.
“Savers will remain in an advantageous position not only until the Fed starts to cut rates, but even once they do, as returns stay ahead of inflation,” says McBride.
2. Mortgages
While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield falling to end 2023 and then moving higher to start 2024, mortgage rates have gone along for the ride.
“Elevated inflation, a robust economy and heightened issuance of government debt have pushed mortgage rates well above the 7 percent mark,” says McBride. “At the very least, inflation will need to resume its downward trajectory before we can expect a sustained move below 7 percent in mortgage rates.”
Mortgage rates remain well above where they were a couple of years ago, and this – following the rapid rise in housing prices over the recent past – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.
The cost of a home equity line of credit (HELOC) should remain flat since HELOCs stay aligned with changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers. Those with outstanding balances on their HELOC will likely see rates stay close to where they are currently, but it can still be a good time to shop around for the best rate.
3. Stock and bond investors
The stock market soared as long as the Fed kept rates at near zero for an extended period of time. Low rates were beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed-income investments such as CDs.
Now with the 10-year Treasury yield rising to start the year and interest rates poised to stay higher for longer, investors have become less enthusiastic about stocks during the last couple of months. However, strong corporate earnings continue to buoy the market.
“Despite investors’ preference for lower interest rates, the continued strength in the economy bodes well for the corporate profits that drive stock prices,” says McBride.
Higher rates hit bonds hard, and the longer the bond’s maturity, the more it’s stung by rising rates. However, with a rate pause and recently rising bond rates, those putting new money into bonds should like what they’re seeing. If and when rates fall, fixed-income investors will benefit as bond prices move higher.
“Bond investors holding to maturity are finding some of the best yields they’ve seen in 20 years,” says McBride.
But with the economy yet to endure a recession and stock valuations at elevated levels, stock investors may still be in for a choppy ride.
“Both stock and bond investors will have to contend with occasional bouts of volatility and be willing to ride those out in order to realize their desired rates of return,” says McBride.
Short-term rates remain attractive if you’re looking for a safe place to stash money while waiting for things to cool off.
4. Borrowers
If you’re an existing borrower and don’t need to tap the market for money – say, you previously locked in a 30-year fixed-rate mortgage in 2021 or 2022 – you’re in good shape. But even with the rate pause, everyone else who’s looking to access new credit is still squeezed, whether that’s credit cards (more later), student loans, personal loans, auto loans or whatever else you might need to borrow for.
The average interest rate on personal loans is 12.22 percent, as of April 24, according to a Bankrate analysis, so the rate pause will likely slow upward pressure on rates there. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent, when the fed funds rate was near zero.
Besides these new borrowers, however, anyone with floating-rate debt is breathing a sigh of relief with the Fed’s decision. Still, you may have an older loan that’s resetting at this year’s higher rates. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates and it may be pushing up your monthly payment, just not as high as it would be if the Fed had raised rates.
5. Credit cards
Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards should remain more or less steady for now. Rates on cards are already at multi-decade highs and rose as the Fed sharply raised rates.
“Prioritize repaying high-cost credit-card debt and utilize a zero percent or other low-rate balance-transfer offer to give those debt repayment efforts a tailwind,” says McBride. (Here are some of the top balance-transfer cards to consider.)
Rates on credit cards are largely a non-issue if you’re not running an ongoing balance.
6. The U.S. federal government
With the national debt nearing $35 trillion, a pause in rising rates will at least temporarily relieve some pressure on the borrowing costs of the federal government as it rolls over debt and borrows new money. That said, the government’s total borrowing costs continue to rise as older debts at lower rates must be rolled over at today’s higher interest rates. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.
As long as inflation remained higher than interest rates, the government was slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt. Now, with interest rates higher than inflation, the tables have turned, and the government is repaying debt with today’s more costly dollars.
With 2024 being an election year, the surging debt and its high carrying cost may impact the re-election prospects of President Joe Biden in an expected rematch with former President Donald Trump.
Bottom line
Inflation ran hot over the last couple of years, but with already-high rates and a clear cooling in inflation, the Fed has decided to leave rates steady for now. Smart consumers can take advantage, for example, by being more discriminating when it comes to shopping for rates on savings accounts or CDs. It can be a good time to lock in longer-term rates on CDs or even get a good balance-transfer credit card.
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