The Federal Reserve is shaking things up – which is both good and bad news for consumers.
The Fed has made some of the biggest policy changes in years since an extensive review. The central bank has revised its approach to inflation and the labor market in progress, which could lead to a prolonged period of low interest rates.
But the new approach will not mean that consumers will save money in general. “The Federal Reserve’s new strategy could divide the landscape for the various financial products important to consumers,” said Lynn Reiser, chief economist at the Ferman Business and Economic Institute at Point Loma Nazaren University.
Here’s how the Fed̵
What has the Fed changed?
Now the Fed is officially less concerned about high inflation. Going forward, central bankers will focus on inflation, which averages 2% over time. This means that after stretching with low inflation, the Fed can allow inflation to exceed 2% over a period of time.
In this sense, the Fed will be less concerned with the strength of the labor market. “The tight labor market is no longer linked to inflation,” said Dan Geller, a behavioral economist and founder of consulting firm Analyticom.
In the past, the Fed’s official position was that a strong labor market could lead to a rise in inflation – as a result, the central bank would move to raising interest rates, even if higher inflation rates have not yet materialized, when the labor market is particularly strong.
The new policy will allow the Fed to keep levels low even if the labor market recovers and inflation rises. As a result, some speculate that it may be many, many years before the central bank raises interest rates again.
Americans will save on credit card interest rates because of the Fed’s new policy
The good news for all Americans with credit cards is that the annual rate of your cards should decrease – or remain low – for the foreseeable future.
“The APR on the cards is still high, but it’s actually the lowest in recent years, mostly thanks to the Fed,” said Matt Schultz, chief credit analyst at LendingTree TREE.
“Their latest announcement means prices are likely to remain low for some time.”
The same applies to other forms of shorter-term debt, including equity credit lines and some personal loans. For short-term loans such as these, most of the interest rate movements are tied to changes in the interest rate of federal funds, which is the interest rate used by commercial banks to borrow or borrow reserves.
The size of federal funds is the benchmark for these forms of debt. Earlier this year, the Fed cut the size of federal funds twice, leading to a drop in interest rates on many forms of consumer debt.
“The Federal Reserve is not the only factor influencing credit card interest rates, but it has definitely been the biggest in recent years,” Schultz said. “The truth is, for most of the last decade, credit card APRs haven’t moved that much, except when the Fed raises or lowers interest rates.”
In the case of credit cards, a lower rate does not necessarily mean affordable. Currently, the average APR on a credit card is 16.03%, well above the rates observed for other credit products such as mortgages or car loans. That’s less than 17.68% a year ago, said CreditCards.com industry analyst Ted Rosman, but that’s only $ 8 a month in savings for someone who makes minimal payments relative to the average credit card debt (which is 5 $ 700 according to the Fed.)
“That’s why credit card debtors shouldn’t expect the Fed to get rid of them,” Rosman said. “It’s really important to pay off your credit card debt as soon as possible because interest rates are so high.”
Your savings account may not generate as much revenue in the future
Interest earned through high-yield savings accounts and certificates of deposit depends on the Fed’s interest rate policy. As such, these savings will not generate significant interest income, as long as the Fed maintains its position with low interest rates amid low inflation.
However, if inflation rises, banks could still raise interest rates on those accounts, Geller said.
Interest rates may actually rise, even if the Fed maintains low levels
“Long-term interest rates will be much less affected by this policy change,” Reiser said. And that includes interest rates.
Mortgage interest rates do not respond directly to Fed movements, as the Fed controls only short-term interest rates. Instead, mortgage interest rates are falling and flowing in response to movements in the long-term bond market, especially the yield on TMUBMUSD10Y’s 10-year treasury,
. Therefore, interest rates are more dependent on the whims of bond investors.
“If investors fear that the Federal Reserve may be late in responding to the build-up of inflationary pressures, long-term interest rates may be higher,” Reiser said. This logic applies not only to 30- and 15-year mortgages, but also to long-term personal and student loans.
The Federal Reserve may take certain actions that would, however, withhold mortgage rates.
“If the Federal Reserve is more adaptable, it could mean they are buying more mortgaged securities and treasuries that could counteract the inflationary effect on longer interest rates on things like mortgages,” Tendai Kapfidze said. , chief economist at LendingTree.