What the Fed Rate Break Means for Your Money

That’s the story we live with the Fed’s relentless pressure to beat down inflation.

The Fed left interest rates unchanged this week, but signaled that inflation remains a scary number in our economy. And it suggested that the interest rate break may be short-lived.

Inflation eased further in May, but remains above normal levels

“The process of bringing down inflation is going to be a gradual one,” Fed Chairman Jerome H. Powell said during a press conference on Wednesday. “It’s going to take some time.”

So what does this mean for your finances?

I had a conversation with Frank Lietke, CEO and President of Ally Invest Securities, about what’s next in this program of horrors that has made it more expensive to buy a home, buy a used or new vehicle, and pay off debt.

Here are four takeaways from the Fed’s recent rate decision.

Consumer prices are still stubbornly high

Powell said the Fed is “acutely aware that high inflation is causing hardship as it eats away at purchasing power, especially for those least able to meet the higher costs of necessities such as food, housing and transportation.”

A year ago, the consumer price index reached a 40-year high of 9.1 percent on an annual basis. Since then, amid ten consecutive Fed rate hikes, the inflation rate has moved downward.

Prices rose 4 percent year-over-year in May, according to the US Bureau of Labor Statistics.

The Fed wants to get inflation back to 2 percent.

Don’t see the Fed pause as a sign that we’re out of the bullish woods just yet, Lietke said. The fall in inflation since last year may feel like we are getting relief, but many consumer goods and services are still painfully high, he pointed out.

The cost of used cars and trucks rose 4.4 per cent. Motor vehicle insurance rose 2 per cent. Clothing and personal care products also increased in May.

“Price stability is the responsibility of the Federal Reserve,” Powell said. “Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that will benefit everyone.”

Prepare for more interest rate hikes

This is where the cool music starts.

“Some further rate hikes would be appropriate this year,” Powell said.

There could be an interest rate increase as early as July, said Lietke.

“I think the Fed realizes that it will likely need more tightening or rate hikes without another massive economic event to get this inflation number under control,” he said. “We see that persisting now for an extended period into 2023. As long as that number is still at the higher level, I think the Fed is going to be pressured and really pushed to continue to increase prices.”

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If there are higher prices, this means higher borrowing costs on large tickets.

From buying a home to a new car, locking in a fixed rate now before interest rates rise again can save you money in the long run. The average interest rate on a 30-year mortgage was 6.69 percent on Thursday, according to Freddie Mac. A year ago, the rate was 5.78 percent. But for the same period in 2021, the 30-year fixed rate was 2.93.

“Housing has corrected a little, but I think if someone is waiting for a mortgage rate of 2 to 3 percent, again, I don’t see that happening in the near future, Lietke said. “Given where prices are expected to go in July, they could go back up.”

Before making a major purchase, consider your personal financial situation.

Are housing prices falling? See what it’s like in your area.

“If you find your dream home and it fits your budget and it’s good for you or your family, don’t let the perfect be the enemy of the good,” Lietke said.

If mortgage rates fall, you have the option of refinancing. The same applies if you need to buy a vehicle.

And if you can afford it, splurge. Don’t let your frugality and your worries about money rob you of paying for some wants.

“Make trade-offs and sacrifices, because the moment you eliminate wants, people can feel a sense of misery,” Lietke said.

Things will get better, but you may have to pull back on unnecessary purchases.

In this inflationary environment, rethink how you distribute your income.

With the increase in the cost of goods and services, more of your money is going to pay for necessities. As a result, you may consider reducing or even cutting out your retirement savings or building an emergency fund.

There is a growing consumption gap between pensioners and younger adults

“The last thing you want to do for your long-term plan is eliminate savings,” Lietke said.

If you can, don’t let the higher expenses derail your savings goals.

Understandably, if you’re living paycheck to paycheck, there may not be any extra to save. But you can plan for a time when your financial situation improves.

Ask yourself: Where do you want to be in one, three and five years?

Then create a plan that might include increasing your job skills or increasing your income. Or set a goal to save even a small amount of money each month, suggests Lietke.

“Small victories have a super-motivating effect on people,” he said. “It’s about setting that plan.”