The Federal Reserve announced that it would keep interest rates steady and the target range for the federal funds rate at 5.25% to 5.5% after meeting on June 11-12. The Fed has raised interest rates a total of 11 times during this economic cycle to tame high inflation, but this will be the eighth time in the past nine meetings that it will keep interest rates steady.
The Fed's decision comes after inflation hit a 3.3% year-over-year increase in May after hitting a multi-decade high of more than 9% in mid-2022. The Fed last raised rates at its July 2023 meeting. With only one rate hike in the past nine meetings, consumers should expect interest rates to eventually fall, but stubbornly high inflation will dictate the timing of any rate cuts.
“Just like a flight that keeps getting delayed by 15 minutes with no end in sight, the timing of when the Fed will start cutting interest rates is equally uncertain,” said Greg McBride, CFA, chief financial analyst at Bankrate.
The Federal Reserve targets 2% inflation, but the pace of decline toward that goal is slowing in 2024.
“While inflation remains elevated and little visible progress toward 2 percent has been made in recent months, the economy is strong enough and financial conditions are accommodative enough that the Fed is not forced to consider cutting rates in the near term,” he said.
The yield on the 10-year Treasury note is trading at about 4.26%, down from a 52-week high of 4.99% hit in October, but has risen sharply since the start of the year. Yields fell sharply at the end of 2023 but rose again after Fed officials pushed back the timing of a rate cut in 2024, pushing back market expectations of a rate cut.
Here are the winners and losers from the Federal Reserve's latest interest rate decision.
1. Savings Accounts and CDs
The Fed's pause on interest rate adjustments for several months has led many banks to also pause interest rate changes on savings, CDs, and money market accounts, while many others have aggressively lowered interest rates in anticipation of future Fed cuts. Still, many banks have kept interest rates high, to the benefit of savers.
“Savers are enjoying the highest yields on savings accounts and term deposits in over 15 years, with the most competitive offers well above the rate of inflation,” McBride says. “What's more, this favorable situation is likely to continue for the foreseeable future. Even when the Fed starts to cut rates, it will likely do so slowly, so attractive savings account and term deposit yields won't disappear overnight.”
Savers looking to maximize their interest income should consider using online banks or large credit unions, which typically offer much better interest rates than those offered by traditional banks.
With CDs, account holders who recently locked in an interest rate will keep that yield for the term of the CD unless they pay a penalty to release it.
Interest rates are likely to fall in the future, so this may be a good time to lock in longer maturities for CDs, especially those with terms between two and five years, while rates are relatively high.
2. Mortgage
Since mortgage rates are heavily driven by the 10-year Treasury yield, the Fed Funds rate doesn't actually affect mortgage rates, but they often move in the same direction for similar reasons. As the 10-year Treasury yield falls through the end of 2023 and then rises in early 2024, mortgage rates are moving along with it.
“Mortgage rates have been above 7% for the past four months and have been fluctuating up and down in a fairly narrow range,” McBride said. “Positive inflation data and an easing job market are likely prerequisites for keeping mortgage rates below the 7% threshold in the near term.”
Mortgage rates remain well above levels of several years ago, a double blow for potential home buyers following the recent surge in home prices, which has made home prices soaring and loans more expensive, contributing to a slowdown in the housing market.
The cost of a home equity line of credit (HELOC) will remain stable because HELOCs are tied to fluctuations in the federal funds rate. HELOCs are typically tied to the prime rate, which is the interest rate that banks charge their best customers. If you have an outstanding balance on a HELOC, your interest rate is likely to remain close to current levels, but it's still a good time to shop around for the best rate.
3. Stock and bond investors
The stock market soared as the Federal Reserve kept interest rates near zero for extended periods. Low interest rates were good for stocks, making them look like a more attractive investment compared to interest rates on fixed-income investments like bonds and CDs.
But despite the prospect of interest rates remaining high for an extended period of time, investors are brushing off the news and pushing stocks higher in anticipation of lower interest rates in the future. At the same time, strong corporate earnings continue to lift the market.
“Stock and bond investors alike have been disappointed that interest rates have not fallen as much as expected this year, but at the end of the day, the continued strength of the economy and corporate earnings is fueling stock rallies and limiting defaults on riskier bonds,” McBride said.
Rising interest rates will hit bonds hard, and the longer a bond's maturity, the more it will be hit by rising interest rates. However, with interest rates stalling and bond rates rising recently, investors putting new money into bonds should feel good about the current situation. If interest rates fall, bond prices will rise and bond investors will benefit.
But with the economy yet to weather a recession and stock prices remaining at lofty levels, stock investors could still find themselves in a precarious position.
If you're looking for a safe place to stash your money while you wait for things to calm down, short-term interest rates remain attractive.
4. Borrowers
If you already have debt and don't need to raise money from the market (for example, if you already have a 30-year fixed-rate mortgage in 2021 or 2022), you're in a good position. But anyone seeking new financing, whether it's credit cards (discussed below), student loans, personal loans, car loans, or any other loans you need to borrow against, is still in a bind, even with interest rates paused.
The interest rate pause will likely lessen upward pressure on interest rates, as the average interest rate on a personal loan was 12.22% as of June 5, according to a Bankrate analysis. But borrowers with better credit may be able to take advantage of lower rates: The average interest rate in 2021 was just 9.38%, when the federal funds rate was near zero.
But beyond these new borrowers, anyone with variable-rate debt is breathing a sigh of relief over the Fed's decision. That said, you may have older loans that will reset at this year's higher interest rates. For example, if you took out an adjustable-rate mortgage years ago, that loan will reset at a higher interest rate, and your monthly payments may go up, but not as high as they would be if the Fed raised rates.
5. Credit Card
Many variable-rate credit cards change the interest rates they charge customers based on the prime rate, which is closely tied to the federal funds rate. The Fed's decision means that interest rates on variable-rate cards will remain roughly flat for the time being. Interest rates on cards were already at their highest in decades and have risen since the Fed raised interest rates so much.
“Prioritize paying off your higher-cost credit card debt and take advantage of 0% or other low-interest balance transfer offers to jumpstart your debt payoff efforts,” says McBride. (Here are some top balance transfer cards to consider.)
If you don't carry a consistent balance, credit card interest rates aren't much of an issue.
6. U.S. Federal Government
With the national debt approaching $35 trillion, a pause in interest rate increases will at least temporarily relieve some of the pressure on the federal government's borrowing costs associated with refinancing debt and new borrowing. However, the need to refinance older, lower-interest debt at current higher interest rates will continue to raise the government's total borrowing costs.
Of course, governments have benefited from long-term declines in interest rates for decades, and while interest rates may rise periodically during strong economic times, they have been steadily falling over the long term.
While inflation was higher than interest rates, governments were slowly using inflation to pay off past debt with today's less valuable dollars. Of course, that's an attractive prospect for governments, but not for the people buying government debt. Now, with interest rates higher than inflation, the situation has been reversed and governments are paying off their debt with today's more costly dollars.
2024 is an election year, and the spiraling debt and its high maintenance costs could affect President Joe Biden's reelection prospects in his expected rematch against former President Donald Trump.
Conclusion
Inflation has been high for the past few years, but with already high interest rates and apparently declining inflation, the Fed has decided to keep interest rates steady for now. Smart consumers can benefit from this by being more careful when choosing interest rates on savings accounts and CDs, for example. It might be a good time to lock in a longer-term interest rate on a CD or get a balance transfer credit card.