Surging inflation has been a problem since 2021, and the Federal Reserve has been working hard to make it more manageable for consumers. To that end, the central bank has raised interest rates 11 times since March 2022.
But at its most recent meeting, the Fed opted to hit pause on its rate hikes. And that marks the fourth consecutive meeting where the central bank has decided to hold rates steady.
A pause in rate hikes could be beneficial to some consumers. But savers might bemoan the fact that rate hikes are, at this point, likely a thing of the past.
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Why the Fed paused rates — and what it means
The Federal Reserve does not establish savings account and CD rates for banks. It also doesn’t set interest rates for lenders and credit card companies. Rather, the Fed is tasked with setting the federal funds rate, which is what banks charge each other for overnight borrowing.
When that rate is higher, it costs more for financial institutions to access near-term funding, which is why loan and credit card rates tend to rise. When the Fed’s benchmark interest rate falls, it costs less for institutions to access money, so they tend to impose lower interest rates for loans and credit card balances.
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Meanwhile, the Fed’s decision to pause interest rate hikes yet again likely stems from a cooling on the inflation front. In December, the Consumer Price Index, which tracks changes in the cost of goods and services, showed that annual inflation was up 3.4%. Meanwhile, the Fed has long maintained that its optimal annual inflation rate is 2%.
Since 3.4% is not so far off, a rate hike wasn’t appropriate at this time. On the other hand, since there’s still a bit of a gap between 3.4% and 2%, the Fed felt that it would be premature to start cutting rates. As such, the central bank opted to simply keep things at the status quo.
What should you do in light of the Fed’s decision?
If you’re a consumer looking to borrow, and your need for money isn’t immediate, then one of the best things to do is wait to sign a personal loan. If you can hold off until rate cuts arrive, you might manage to lock in a lower interest rate, resulting in lower monthly payments.
Meanwhile, if you owe money on a credit card, it’s always a good idea to try to pay it off as quickly as possible to avoid racking up additional interest. However, the fact that rate hikes were paused means that the interest rate on your credit card balance might hold relatively steady.
Now, if you have money in savings, you should know that the interest you’re earning on your cash today may not be the interest you’re able to earn a few months down the line. So if you have money in your savings account you don’t need for emergency fund purposes, you may want to move at least some of it into a CD.
CD rates are pretty attractive right now. And because the Fed has held its benchmark interest steady for four consecutive meetings, it tells us that we’re unlikely to see additional rate hikes in 2024.
This means that CD rates are unlikely to increase from where they are today. If anything, they could drop quite a bit during the year. So now could be a good time to open a CD if you have money to spare.
All told, the Fed’s decision isn’t particularly surprising. Given where inflation is now, many experts anticipated that the central bank wouldn’t raise interest rates, but that rate cuts would have to wait. Things could change in the coming months, though, so be sure to keep tabs on the Fed’s decisions, as they have the potential to impact your finances in different ways.
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