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In November, the Federal Reserve announced it would continue to pause raising interest rates. While there’s no guarantee rates won’t go up in the future, some experts believe the Fed may be done raising rates.
Since early 2022, the Fed has steadily increased interest rates from near zero to above 5.25%. They were aiming to keep inflation from getting out of control and encourage responsible borrowing and lending.
Although inflation has decreased from its peak in 2022, it remains stubbornly high. The year-over-year inflation rate in September was 3.7%, well above the Federal Reserve’s target of 2%.
This, combined with elevated prices and interest rates, suggests that we may face a period of financial turbulence for some time. All of this can directly impact things like savings accounts, credit cards, and loans. Here’s how the latest Fed pause affects your money.
The Federal Reserve has the ability to adjust the federal funds rate, or the rate at which banks lend money to each other. This rate serves as a benchmark for other interest rates in the economy, such as mortgage rates and credit card rates.
When the Fed wants to stimulate the economy, it may lower the fed funds rate, making borrowing cheaper and encouraging spending. If the Fed wants to cool down an overheating economy or combat inflation, it may raise the federal funds rate, making borrowing more expensive.
The Fed has raised 11 times over the past 18 months and paused rate hikes three times. Interest rates are currently at a 22-year high. While the rate pause means interest rates won’t go up right now, it’s unlikely the Fed will cut rates anytime soon. There’s also the chance rates will rise again this year.
Interest rates don’t just affect how banks lend to each other. They also directly impact different aspects of your financial life. Let’s take a closer look.
Higher interest rates can be good news for savers.
Banks often offer higher interest rates on savings accounts, money market accounts, and certificates of deposit (CDs) when interest rates rise. This means that your savings can earn more interest over time, allowing your money to grow faster.
Case in point: Interest rates on savings accounts have risen to recent highs. The national average rate has risen from near 0% a few years ago to 0.60%.
A Fed pause means that the interest rates on savings accounts are likely to remain steady for some time. With interest rates already high, this pause gives you the opportunity to earn a competitive interest rate on your savings.
If you haven’t yet, now’s a good time to consider switching to a high-yield savings account or money market account. These accounts come with interest rates as high as 5% — well outpacing inflation. While their rates may fluctuate over time, they’re fairly liquid and give you easy access to your money.
If you’re able to lock up some of your money for a period of time, now’s the time to open a certificate of deposit (CD). These accounts offer some of the highest interest rates: over 5%, depending on the term.
Mortgage rates are hovering around 8%, the highest level since 2000. Auto loan rates are also the highest they’ve been in 16 years.
A pause typically means mortgage rates and auto loan rates may stabilize. But keep in mind that mortgages and auto loans are also affected by market conditions and lender policies.
If you’re looking to buy a home or car, expect rates to stay high for a while. Even if inflation does go down, it’ll take some time for interest rates to trickle down to mortgages and auto loans.
Higher interest rates mean higher monthly payments. Take a close look at your finances and determine what you can comfortably afford.
You may need to adjust your expectations and consider more affordable options. Consider saving for a larger down payment, which can help reduce the loan amount and potentially improve your loan terms.
While shopping, compare rates from different lenders. Even a small difference in interest rates can have a significant impact on your monthly payments and the overall cost of the loan.
Credit card interest rates are not directly tied to the federal funds rate. But they can still be influenced by changes in the overall interest rate environment.
Unlike most mortgages or auto loans, which typically remain fixed over the course of the loan, credit card rates are variable and can change at any time.
The average credit card interest rate right now is 20.72%. But rates can run much higher depending on the type of card and your credit score.
The rate pause means your existing credit card rates may seem stable for now. This can provide some relief if you’re carrying credit card debt.
If you’re carrying credit card debt, it’s a good idea to focus on paying it off ASAP. Aim to pay more than the minimum payment each month. By doing so, you can reduce your balance faster and minimize the interest charges you accrue.
If your current card has a high interest rate, you may want to transfer your balance to a card with a lower interest rate. This can help you save on interest payments and make it easier to pay off your debt.
It’s unlikely the Fed will cut rates anytime soon, but they may continue pausing rates as inflation continues to come down.
This means you have some breathing room to take stock of your financial situation. Here are a few additional money moves to consider.
“When looking at interest rate investments, the first thing to consider is when you need the money,” says Jeremy Keil, a certified financial planner. “You should always match up when you need the money with the length of time you lock in your investments.”
Now may be the time to lock in high rates by opening a CD. If rates fall in the future, you’ll benefit from these higher rates. Of course, if the Fed resumes its rate hiking, you’ll be stuck with the lower rate.
To help mitigate this risk, consider a CD ladder strategy, which can help you benefit from fixed rates while offering more access to your money.
If the Fed starts lowering rates again, interest rates on things like mortgages and credit cards will also begin to fall. But it may be some months (or years) until mortgage rates and auto loan rates fall to pandemic lows.
As always, it’s a good idea to avoid taking on too much credit card debt, especially with rates this high. Avoid credit card interest whenever possible by paying your balance in full each month.
With the Fed pausing its interest rate increases, it’s important to understand how it can affect your financial life. If this truly is the peak for interest rates, now’s the time to lock in high rates for your savings and avoid borrowing.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.