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Fed's Hike Halt: Refraining Rates Upturn



The Federal Reserve's decision to pause its rate-hiking campaign after 15 consecutive increases comes as a relief for consumers who have been grappling with higher borrowing costs. The impact of the rate hikes has been significant, particularly on mortgages, with rates surging from 3.2% to 6.8%. Accordingly, monthly payments for a typical home have skyrocketed by an alarming 50%, putting additional strain on homeowners. Furthermore, credit card rates have surged to all-time highs, leaving existing borrowers grappling with interest rates that are a daunting 5 percentage points higher than those they encountered previously. The ongoing rate hikes by the Federal Reserve have contributed to this upward trend, as banks have incorporated these increases into their fee schedules. This has resulted in credit card APRs exceeding 20%, placing a heavy burden on consumers carrying revolving balances. On the other hand, auto loan rates have remained relatively stable, hovering around an average of 7%. The stability in auto loan rates is more closely tied to buyer demand for vehicles rather than the Federal Reserve's interest rate decisions. While borrowers have been feeling the impact of the rate hikes, savers have seen some benefits. Yields on savings accounts and certificates of deposit (CDs) have reached their highest levels in a decade. However, as the Federal Reserve pauses its rate hikes, further increases in yields may be comparatively small. Banks are expected to slow down their deposit rate hikes, tempering the rate of return for savers.


Prior to the decision, the central committee of the Federal Open Markets Committee held a meeting in Washington, D.C. on June 13-14, 2023. The meeting focused on deliberations regarding the target rate for federal funds. Following thorough examination and analysis, a consensus was reached to maintain the rate within the range of 5% to 5.25%. Their decision to hold the hike was due to inflation finally slowing down, prompting a need to assess the efficacy of prior rate increases in containing inflationary pressures. In addition, the Federal Reserve's decision is perceived as a response to the present economic situation, which includes worries about inflationary pressures, supply chain disruptions, and international economic uncertainties. Rising interest rates have also been significant, forcing lending rates throughout the economy to reach their highest levels in decades, from credit cards to corporate loans. The Fed's move reflects the Fed's view on the state of the economy and represents its cautious stance toward monetary policy alterations. Furthermore, it is regarded as a significant change from its prior tightening approach. The objective of the Fed is to attain a 2% inflation rate, but experts differ in their opinions on the required duration to achieve this target. The existence of substantial uncertainty, as evidenced by the recent failures of three prominent U.S. banks earlier this year, contributes to the cautious approach of policymakers in refraining from further interest rate hikes. The Fed's focus on making decisions based on data is apparent in their deliberate choice.


Actions on the interest rates induced a ripple effect on other rates, including mortgage rates and auto loans. Mortgage rates will likely follow the same trail as the rate pauses. After the debt ceiling dispute was resolved, mortgage rates have gone down. According to Michele Raneri, Vice President and Head of U.S. Research and Consulting at TransUnion, this effect could lift consumers following the sharp increase in house loans. On the other hand, the credit card rate has increased significantly due to the Fed’s decision which is estimated to jump from 23.98% to above 24% by Junez. Auto loans seem relatively stable and have stayed constant at an average of 7%. Ken Tumin, a banking expert and founder of DepositAccounts.com, mentioned that any subsequent rises in yields might be modest given that the Fed has paused on raises for the time being. This explains how people would move opening up Certificate of Deposits (CDs) Accounts to aim for higher interest rates, as The Fed hinted that it might begin raising rates later in the year. Policymakers anticipate a final rate of approximately 5.6%, which implies two more spikes in rates before the end of 2023. Nigel Green of deVere Group, a group of financial advisors, stated that this is the time for the Fed to stop hiking the interest rates since monetary policies have a typically lengthy temporal lag. For the time being, consumers are the ones benefiting most from the situation. However, any future announcements by the Fed will leave consumers in question as to which side it favors.


Sources:

CBS News

CNBC

CNN


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