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The Federal Reserve halts rate hikes for the first time in 15 months. Here is the financial consequence.




The Federal Reserve is pause in raising interest rateswhich marks the first break after 15 months of consecutive increases, a change that could bring a touch of relief to consumers struggling with more expensive mortgages, credit cards and other loans after 10 consecutive rate hikes.

The difference in borrowing costs from March 2022, when the Fed began raising interest rates in an attempt to stem inflation, is stark. In early 2022, the interest rate on a conventional 30-year mortgage was about 3.2% – now it’s 6.8%, meaning the monthly mortgage payment on a typical $300,000 home now costs 50% more. The annual percentage rate on credit cards have reached records and now top 20%, while the cost of other loans is also higher.

The central bank has raised interest rates to curb the hottest inflation in 40 years. The good news is that federal data on Tuesday showed that the effort is working, with May̵[ads1]7;s consumer price index rising at the slowest pace in two years. Because of the progress in inflation, economists had expected the Fed to hold off on Wednesday with another rate hike to gauge the economy’s strength and to ensure the bank does not “accidentally tighten too much,” according to Goldman Sachs analysts.

“Pausing rate hikes is definitely better than continuing them, but the damage is mostly already done,” noted Matt Schulz, chief credit analyst at LendingTree. “If everyone was confident that there weren’t going to be more rate hikes going forward, there would be a slightly different opinion. But it’s still up in the air whether this is a short break or whether this is a longer-term change.”

Here’s how the Fed’s move to hold the line on interest rates could affect your money.

Mortgage interest

Mortgage rates are likely to remain stable after the Fed break. That could provide a boost to consumers after the rapid rise in mortgages, Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, said in an email.

Raneri said a homebuyer taking out a 30-year loan with a current rate of 6.8% for a $300,000 home would have monthly payments of $1,956 — a 50% increase from the monthly mortgage payment of $1,297 dollars that the same borrower would have paid in January 2022, when mortgage rates were 3.2%.

Still, prices could fluctuate this year as the housing market reacts to economic uncertainty, according to Jacob Channel, senior economist for LendingTree. Mortgages have since fallen debt ceiling problem was settled, a sign that the mortgage market is sensitive to trends beyond the underlying federal funds rate, Raneri said.

“Going forward, mortgage rates are likely to continue to fluctuate as the housing market continues to respond to the uncertainty permeating today’s economy,” Channel said in an email. “That said, if the economy cools in the coming months, mortgage rates could end the year closer to 6% than 7%.”

Selma Hepp, chief economist at real estate research firm CoreLogic, added in an email that mortgage rates, while gradually declining, “will likely remain higher throughout the rest of the year.”

Credit card rates

Consumers with credit card balances aren’t likely to see relief anytime soon, according to LendingTree’s Schulz. In fact, APRs could continue to rise, even despite a Fed pause, because some banks still incorporate the latest Fed rate hikes into their own fee schedule, he noted.

The typical rate for a new credit card is likely to jump above 24% this month, up from a record 23.98% in LendingTree’s May analysis, Schulz noted.

“It’s just really, really loud,” he added.

The APR on existing credit cards is nearly 21%, which is the interest rate paid by people who carry revolving balances on their cards, and is the highest since 1994, Schulz noted.

Borrowers essentially face interest rates that are 5 percentage points higher than in March 2022, when the Fed began raising rates, according to TransUnion.

“Based on the current average total card balance per consumer of $5,800, this translates to an additional $290 in annual card interest costs per consumer,” Raneri noted.

Car loan

Loan rates for new vehicles have remained constant in recent months at an average of around 7%. That likely won’t change even if the Fed leaves interest rates alone for now, said Ivan Drury, senior manager at Edmunds.com. Auto loan rates tend to reflect buyer demand for vehicles more than they do the Fed’s rate decisions.

Car sales, while still well below pre-pandemic levels, remain fairly strong, while vehicle prices remain high after rising sharply during the pandemic. Unless sales decline significantly, companies and retailers are unlikely to reduce prices or offer better loan rates.

New vehicle prices averaged $47,892 in May, 1.3% below the December peak. Any decline has nevertheless been offset by higher loan interest rates, which have risen by almost half a percentage point in the same period.

Savings accounts, CDs

The returns on savings accounts and certificates of deposit are the highest they have been in a decade, although the increase is slowing. With the Fed holding off on hikes for now, any further increases in yields could be relatively small, said Ken Tumin, a banking expert and founder of DepositAccounts.com.

“The banks will have reason to slow down deposit rate increases,” he said.

Still, it’s worth noting that these accounts are much more rewarding than they were a year ago. The average rate of return on online savings accounts is now 3.98%, up from 3.31% at the start of this year and from 0.73% a year ago, according to DepositAccounts.com. The average yield on an online 12-month CD is 4.86%, up from 4.37% at the start of the year and from 1.49% a year ago.

What’s next for the Fed?

The Fed signaled it may resume rate hikes late in the year, with policymakers projecting a final rate of around 5.6%, indicating two more rate hikes before the end of 2023.

That surprised Wall Street, with stocks falling after the Fed announcement. The Dow Jones Industrial Average fell 1% on the prediction that more rate hikes could be in the offing.

“The battle against inflation is being won. Now is the time for the Fed to stop — not pause — rate hikes,” Nigel Green of the deVere Group, a group of financial advisers, said in an email. “The time lag for monetary policy is notoriously long.”

In other words, consumers can wait until they see significantly lower borrowing costs.

With reporting from the Associated Press.



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