The Fed announced after its June 13-14 meeting that it would keep rates on hold, keeping the federal funds rate unchanged at its target range of 5.0-5.25%. The move ended the Fed’s 10th consecutive meeting saying it had sharply cut liquidity to financial markets and raised interest rates to curb high inflation.
The Fed’s decision comes after inflation hit a multi-decade high of over 9% in mid-2022 before falling to 4% year-on-year in May. The Fed has now taken a breather, but some forecast it could raise rates further by the end of the year if conditions permit.
“The Federal Reserve is nearing the end of rate hikes,” said Greg McBride of the CFA, Bankrate’s chief financial analyst. “After the fastest rate hikes in 40 years, interest rates are high enough to have a slowing effect on the economy. At stubbornly high levels, it’s too early for the Fed to drop the tent and go home.”
The 10-year Treasury yield is currently around 3.8%, well below the 52-week high of 4.33% reached in October 2022. Falling long-term yields while the Fed continues to raise short-term rates suggests: Investors are worried about the stability of the financial system following recent bank failures and are bracing for a short-term recession.
The latest decision reveals winners and losers as the Fed skips its turn to hike rates.
1. Savings account and CD
Flat interest rates mean many banks are likely to suspend (or at least delay) earning returns on savings and money market accounts, but some banks are still competing. There is a possibility that they are competing for a position using a powerful APY.
“With the Fed on the sidelines, there is no incentive to push yields on savings accounts and CDs,” McBride said. “The big wins for savers in the coming months will come not from interest rates continuing to rise, but from inflation continuing to fall.”
Savers looking to maximize their return on interest rates typically consider turning to online banks or top-tier credit unions, which offer rates far superior to those offered by traditional banks. need to do it.
With respect to CDs, account holders who have recently fixed interest rates will keep that yield for the duration of the CD unless they are willing to pay a penalty.
With interest rates likely nearing a ceiling, it may be a good time to lock in longer maturities in CDs, especially 2- to 5-year terms, while they remain relatively high.
2. Mortgage
The Fed Funds rate doesn’t really affect mortgage rates, which are heavily dependent on 10-year Treasury yields, but they often move in the same way for similar reasons. Mortgage rates have trended higher but remain high as 10-year Treasury yields have fallen from their all-time highs as market prices could plunge into recession.
“With core inflation remaining high, we are unlikely to see a significant improvement in mortgage rates even if the Fed does not raise rates further,” McBride said. “The term ‘long term rising interest rates’ definitely applies to mortgage rates.”
Mortgage rates are still well above the levels of a year ago, creating a double whammy for potential homebuyers following the rapid rise in home prices over the past few years. Soaring house prices and higher lending are leading to a slowdown in the housing market.
The cost of the Home Equity Line of Credit (HELOC) should remain flat as the HELOC stays in line with changes in the Federal Funds Rate. HELOC is usually tied to the prime rate, which is the interest rate that banks charge to good customers. If HELOC has an outstanding balance, the interest rate will remain stable. Even if prices stay flat, it can be a good time to weigh the best deals.
3. Equity and bond investors
As long as the Fed kept interest rates near zero for an extended period of time, the stock market soared. Low interest rates favored equities, making equities appear to be a more attractive investment compared to interest rates on fixed income investments such as bonds and CDs.
Now that 10-year Treasury policy has eased, investors believe the end of rate hikes is in sight, and stocks have surged in recent months. Still, rising interest rates, if not triggering a full recession, should slow growth and thus corporate earnings.
“The Fed is nearing the end of its rate hikes, but the economy hasn’t turned around yet, so equity investors see the glass as half full,” McBride said. “The hope of avoiding a recession underpins the recent breakthrough as stock markets reflect expectations of future performance rather than past or current performance.”
Rising interest rates hit bonds hard, and the longer a bond’s maturity, the bigger the hit from rising interest rates. But with interest rates suspended and investors expecting the Fed to end its aggressive tightening, the bond market is finding its price floor. And those who are putting money into new bonds should love what they see.
“The Fed is far from cutting rates, but rates are at their highest in 15 years and the bond market is seeing the light of day,” McBride said. “Bond investors are happy to recoup 5%.” [yields] Until the day comes when interest rates start to fall. ”
Bond investors will benefit as bond prices rise when interest rates start to fall again. However, the economy is still unable to withstand recession and stock investors may still find themselves in a precarious situation.
Short-term rates are still attractive if you’re looking for a safe place to store your money until things calm down.
4. Borrower
If you’re an existing borrower and don’t need to go to the market for financing, say you have a 30 year fixed rate mortgage confirmed in 2021 or 2022, you’re fine. But even if interest rates were suspended, new loans, whether it be credit cards (more on that later), student loans, personal loans, car loans, or anything else you might need to borrow Everyone else trying to access credit is still squeezed.
Bankrate analysis showed that the average interest rate on personal loans was 11.05% per annum (APR) as of June 7, and the suspension of interest rates is likely to dampen upward pressure on interest rates in the country. However, borrowers with better credit may be able to take advantage of lower interest rates. The average interest rate in 2021, when the federal funds rate was near zero, was just 9.38% per annum.
But aside from these new borrowers, those with floating-rate debt are breathing a sigh of relief at the interest rate suspension. Still, old loans may reset with higher interest rates this year. For example, if you took out a variable-rate mortgage many years ago, that loan may have reset at a higher rate, pushing up your monthly payments, though not as much as if the Fed had raised interest rates. there is.
5. Credit card
Many floating rate credit cards change the rate they charge their customers based on the prime rate, which is closely related to the Federal Funds Rate. The Fed’s decision means that interest rates on variable rate cards will remain largely stable for the foreseeable future. But card rates are already at their highest in decades and are rising as the Fed sharply raises rates.
“Priority pay off your high credit card debt and take advantage of zero percent or other low-interest balance transfer offers to give your debt service a boost,” McBride said.
If you don’t have a balance, your credit card rate doesn’t matter much.
6. U.S. FEDERAL GOVERNMENT
With the national debt at nearly $32 trillion, a moratorium on interest rates would at least temporarily ease the pressure on borrowing costs as the federal government rolls out debt and borrows new money. Of course, governments have benefited from lower long-term interest rates for decades. Interest rates can rise cyclically during good times, but they have fallen steadily over the long term.
As long as inflation is higher than interest rates, governments are gradually taking advantage of inflation to repay previous debt with today’s depreciating dollars. An attractive prospect for governments, of course, but not for those who buy government debt.
Conclusion
Inflation has been intensifying in recent years, but after rapidly raising interest rates to combat inflation, the Fed has decided not to raise rates this time. Whether or not this moratorium marks the end of rate hikes is unclear, but in any case smart consumers will take advantage of this by being more discriminating when buying interest rates on savings accounts and CDs, for example. You can. One of his options for those looking for some protection against inflation is Series I bonds, which he offers a stable annual rate of 4.3% on bonds purchased through October 2023.
