Rising inflation has been a problem since 2021, and the Federal Reserve is 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 chose to hold off on its rate hike. And that marks the fourth consecutive meeting where the central bank has decided to keep rates on hold.
Stopping price increases may be beneficial to some consumers. But savers may bemoan the fact that rate hikes, at this point, are likely a thing of the past.
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Why the Fed stopped raising rates – and what it means
The Federal Reserve does not set savings account and CD rates for banks. It also does not set interest rates on lenders and credit card companies. Instead, the Fed is tasked with setting the federal funds rate, which is what banks charge each other for overnight borrowing.
The higher that rate is, the more it costs for financial institutions to access near-term funding, so 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 charge lower interest rates for loans and credit card balances.
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Meanwhile, the Fed’s decision to stop raising interest rates again likely stems from a cooling front on inflation. In December, the Consumer Price Index, which tracks changes in the cost of goods and services, showed that annual inflation rose to 3.4%. Meanwhile, the Fed has long maintained that the optimal annual inflation rate is 2%.
Since 3.4% is not that far off, a rate hike is not appropriate at this time. On the other hand, since there is still a small gap between 3.4% and 2%, the Fed feels that it is not yet time to start cutting rates. Thus, the central bank chose to simply keep things status quo.
What will you do in light of the Fed’s decision?
If you are a consumer looking to borrow, and your need for money is not immediate, then one of the best things to do is to wait to sign a personal loan. If you can hold off until the rate cuts come, you can 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 soon as possible to avoid extra interest. However, the fact that rate increases are on hold means that the interest rate on your credit card balance can remain constant.
Now, if you have money in savings, you should know that the interest you earn on your cash now may not be the interest you earn a few months down the line. So if you have money in your savings account that you don’t need for emergency fund purposes, you can move some of it to a CD.
CD rates are quite attractive right now. And since the Fed has kept its benchmark interest rate steady for four consecutive meetings, this tells us that we’re unlikely to see another rate hike in 2024.
This means that CD rates are unlikely to rise from where they are now. If anything, they may fall a little during the year. So now might be a good time to pop a CD if you have some cash to spare.
All told, the Fed’s decision isn’t all that surprising. Given where inflation is now, many experts expect the central bank not to raise interest rates, but that rate cut will have to wait. Things may change in the coming months, however, be sure to keep an eye on the Fed’s decisions, as they are likely to affect your finances in various ways.
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