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The Federal Reserve won’t be raising interest rates in September. Read on to see why that’s a good thing.
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The Federal Reserve has been on a mission to cool inflation. And while its work isn’t quite done, a lot of progress has been made.
In August, the Consumer Price Index, which measures changes in the cost of consumer goods and services, was up 3.7% on an annual basis. Given that inflation peaked at 9.1% in mid-2022, 3.7% is a vast improvement.
However, the Fed’s optimal inflation rate is 2%. It’s this level, the central bank feels, that’s most conducive to long-term economic stability. And we’re still not quite at that level as far as inflation is concerned.
As such, it was unclear as to whether the Fed would opt to raise interest rates yet again at its September meeting. The central bank has already raised interest rates 11 times since March 2022.
Thankfully, the central bank just announced that it will pause its rate hikes for the time being. And that could spell a world of relief for consumers looking to borrow, as well as those with outstanding debt.
A lifeline for consumers
The Federal Reserve does not set consumer borrowing rates. When you sign a personal loan or mortgage, your lender is the entity that determines what interest rate to charge you. Rather, the Fed oversees the federal funds rate, which is the rate banks charge each other for short-term borrowing.
However, when that benchmark interest rate rises, lenders tend to pass their higher borrowing costs onto consumers via more expensive rates for products like home equity loans and auto loans. That’s what’s been happening over the past year and a half. And it’s made borrowing extraordinarily expensive for consumers who are simultaneously grappling with elevated living costs. So the fact that the Fed has decided against a 12th rate hike for now is a good thing.
Furthermore, the decision to pause rate hikes is apt to work out well for consumers with existing HELOC (home equity line of credit) and credit card balances. These products tend to come with variable interest rates, so when the Fed raises rates, borrowers tend to see their monthly payments go up. But now, people in that boat get a bit of relief.
Savers are still in a pretty good place, too
While rising interest rates can be problematic for consumers looking to borrow or those paying down debt, they can be a positive thing for savers with money in the bank. Over the past year, savings account and CD rates have soared, allowing savers to earn more on their money.
Since the Fed is pausing rate hikes, we may not see banks raise their interest rates. But the Fed also isn’t cutting rates. So the interest rate you’re able to get on your savings account right now might hold steady. And you might still be able to lock in a CD at a competitive rate in the coming weeks and months — so if you have money to spare, don’t wait to open a CD.
Given the progress that’s been made on fighting inflation, it’s not so surprising to see the Fed pause its rate hikes. But that doesn’t mean another rate hike isn’t in the future.
The Fed says that it plans to wait for more data to understand how previous rate hikes are affecting the economy before raising rates again. But we could still see another rate hike in the future. So it’s important to keep tabs on what the Fed is doing, since it has the potential to impact your finances in a very big way.
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