The Federal Reserve left interest rates at a 23-year high for the seventh consecutive meeting, delaying rate cuts as officials await more clues that inflation is making its way back toward their goal.
The decision means that officials on the Federal Open Market Committee (FOMC) will keep their key benchmark federal funds rate in a target range of 5.25-5.5 percent, where it’s held since July 2023.
Consumers will also continue seeing historically pricey borrowing costs on everything from credit cards and auto loans to mortgage rates and home equity loans. Yet, they can also keep taking advantage of the highest yields on savings accounts and certificates of deposit (CDs) in more than a decade.
Policymakers were in a hurry to lift borrowing costs to conquer red-hot inflation after the pandemic, raising interest rates 11 times across 12 meetings at the fastest pace in 40 years. Yet, when it comes to the way back down, officials are taking their time as inflation gives mixed signals and the U.S. economy remains resilient.
But Fed officials have a tricky job ahead of them. Proponents of maintaining high interest rates can find plenty of data to back up their position, while those advocating for rate cuts are likely able to spot vulnerable areas in the financial system, too. Supporting the high-rate camp, employers created a surprising 272,000 new jobs in the month of May while unemployment remains historically low and inflation is still well above the Fed’s 2 percent objective thanks to stubborn rent inflation.
At the same time, unemployment officially hit 4 percent in May for the first time since January 2022, an undeniable increase from the half-century low of 3.4 percent. The latest consumer price index (CPI) report, meanwhile, showed that both goods and services prices are starting to decline. Over the past month, inflation was flat for the first time since July 2022.
Interest rate cuts aside, borrowing costs are bound to stay painfully high for those who carry high-interest debts or are in the market for a big-ticket purchase.
The Fed’s rate decision: What it means for you
Savers
Lower rates mean annual percentage yields (APYs) at the nation’s highest-yielding online banks eventually might not be a flashy 5 percent. Yet, savers should think about their returns on an inflation-adjusted basis — and the gap between your yield and inflation should continue to grow if both prices and borrowing costs decline.
Bankrate’s rankings of the 10 best high-yield savings accounts for June are all offering a yield higher than the current inflation rate of 3.3 percent. They range from a low of 5 percent to a high of 5.3 percent. That’s also nearly nine times higher than the yield at the average U.S. bank and 400-500 times higher than the nation’s largest depository institutions Chase and Bank of America.
The best part is that many of the nation’s highest-yielding banks come with Federal Deposit Insurance Corp. (FDIC) protections, making it possible for savers to safely earn a market-like return on their emergency savings within certain limits. A $10,000 balance in an account with a 5 percent APY would yield a saver $500 in just a year, assuming rates stay at that level, Bankrate’s savings calculator shows.
Not to mention, savers shouldn’t confuse rate cuts with the near-zero interest rates of the coronavirus pandemic-era. Borrowing costs are likely to remain high, keeping yields on savings accounts elevated.
If you have at least six months’ worth of expenses stashed away in a savings account, the one step you can take to continue reaping the benefits of higher rates — even if they do indeed decline — involves locking in a CD.
Today, the top-yielding 5-year CD can offer a depositor a 4.5 percent APY, while the best 2-year CD is paying 4.76 percent a year in interest, Bankrate data shows.
Borrowers
The main message for borrowers: Higher rates aren’t going anywhere, and even rate cuts likely won’t be enough to bail you out of the pain of high-interest debt.
If you have credit card debt, be sure to find ways to rid yourself of it as quickly as possible. A solution to speeding up your debt repayment is the use of balance-transfer cards. Bankrate’s picks of the best offers on the market are currently advertising a 0 percent introductory annual percentage rate (APR) for as long as 21 months. You’ll need to have a debt pay-off plan, but transferring your balance could save you hundreds, if not thousands, of dollars in the long run — even if it comes with a fee.
Borrowers who’ve improved their credit score in recent months may also be able to lock in a lower interest rate. Whether you’re opening a new line of credit or looking to refinance an existing debt, be sure to compare options from at least three lenders to ensure you’re finding the best deal.
Homebuyers
Would-be homebuyers may be starting to forget the days when the 30-year fixed-rate mortgage once held below 3 percent. Since February, the key home financing rate has been holding above 7 percent — representing at least a 41 percent hit to homebuyer affordability alone.
That’s because financing $500,000 on a 30-year fixed-rate mortgage would’ve cost a borrower roughly $2,371 a month in principal and interest when rates hit a record low of 2.93 percent in Bankrate’s national survey of lenders. Today, that monthly payment has skyrocketed to $3,353, according to Bankrate’s mortgage calculator.
Mortgage rates have also been stuck above 6 percent since September 2022, Bankrate data shows.
Yet, good news could be on the horizon if inflation continues cooling. Mortgage rates are more closely tied to the 10-year Treasury yield and could even fall before the Fed starts cutting interest rates.
Just don’t expect anything close to those pre-pandemic levels. You might not even see mortgage rates fall below 6 percent, so long as economic growth holds up.
High mortgage rates are only one aspect plaguing prospective buyers. Low inventory is also keeping a floor on how low prices can go. A Bankrate analysis showed that Americans must earn at least $100,000 annually to afford a median-priced home in 22 states and the District of Columbia, a Bankrate analysis shows.
To set yourself up for homeownership in the future, prioritize paying down any debts, improving your credit score and saving for a down payment. If you can’t find a home within your price range, it might be wise to keep renting, so you can prioritize growing your income and wealth.
Investors
Interest rates may be the highest in 23 years, but that isn’t ruining investors’ moods lately. The S&P 500 has crushed multiple records so far in 2024, as market participants hope that rate cuts from the Fed aren’t that far off.
Federal funds rate futures markets offer a solid reason why they’re so optimistic. After expecting that the Fed would only be able to cut interest rates once this year, starting in November, investors have now reshifted their expectations to bet on two rate cuts, beginning in September and followed by another reduction in December.
That doesn’t mean another economic bogeyman could show up to ruin the party. But if you’re investing for longer-term goals such as retirement, remember to take a long-term mindset. A diversified portfolio and time in the market are the best ways to protect your investments. Falling stock prices can also mark a significant buying opportunity.
— This is a developing story. Check back for more updates.
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