by Stephen Reed | Accounting News, News, Newsletter
After two years of rapid interest rate hikes, which sent mortgage and credit card rates soaring, investors and consumers are wondering when the Federal Reserve is planning to lower interest rates. In short, the Fed is looking for more positive signs from the economy, but rate cuts will likely happen in 2024. Read on to learn how soon this might happen.
Inflation and the Fed
In March 2022, the Federal Reserve initiated a series of rate hikes as a strategic measure to combat soaring inflation rates, a traditionally effective method used to curb consumer spending and mitigate price surges. Since then, the central bank has executed 11 rate hikes, which have significantly reduced the annual inflation rate to 3.1% in January, down from its peak of 9.1% in June 2022. However, January’s figure was higher than economists’ projections – and persists above the Fed’s target of lowering inflation to 2%. Given January’s hot inflation data, deep rate cuts aren’t likely to happen soon.
When to Expect the First Cut
Because January’s number was higher than previously forecasted, economists are now projecting the Fed’s first cut will happen farther along in 2024 than they had earlier estimated. This means the Fed’s next meeting in March is unlikely to result in cuts, and some are saying the May meeting may even be too soon. Instead, most economists aren’t expecting the first rate cut until the Fed’s June 12 meeting.
What Does This Mean for Americans?
Borrowers likely won’t see changes to loan terms anytime soon. Credit card rates, auto loans, and other credit products that are based on the Fed’s benchmark rate will likely stay steady at or near their current levels until the first rate cut.
Mortgages are slightly different. When inflation growth is worse than expected, mortgage rates tend to increase. Therefore, we might see a rise in mortgage rates in the upcoming weeks, but ultimately stabilizing around 6% by year’s end.
What to Do with Your Money in the Meantime
Here are some steps you can take with your money while you wait for rates to drop.
Open a Certificate of Deposit
When the Federal Reserve reduces rates, annual percentage yields (APY) on savings accounts also decrease. However, interest rates on certificates of deposit (CDs) remain unchanged once the account is opened, ensuring a fixed rate regardless of any fluctuations in APYs.
Strengthen Your Credit Score
If you’ve been holding out for lower rates before applying for a mortgage or personal loan, it’s time to prepare. Lenders heavily weigh your credit score in the approval process to determine the interest rate you’ll receive. While a credit score of 620 is the starting point for a conventional mortgage, aiming for a score of at least 750 can help you qualify for the most favorable rates.
To be sure your credit score is primed for the best rates, make on-time payments of credit cards and loans in full; request higher credit limits in order to lower your credit utilization ratio; and hold off on applying for new lines of credit as the application could require a hard inquiry that hits your credit.
by Stephen Reed | Accounting News, News
Last year the Federal Reserve began raising interest rates at a pace not seen since inflation soared this high 40 years ago. By raising interest rates, borrowing becomes more expensive for individuals and businesses, which can lead to reduced spending and investment. This, in turn, can help slow down inflationary pressures. The Fed recently approved its 10th interest rate increase in the effort to curb inflation, but are these hikes working? We discuss below.
A Subtle Hint
Will this be the Fed’s last rate hike for a while, or will the central bankers raise rates yet again at their June meeting? The Fed issued a recent statement in which they dropped a line that was previously used about the likely need for additional rate increases, which has caused some to speculate that the Fed may be pausing rate hikes. Given signs of a softening job market and slower economic growth, as well as brewing turmoil in the banking sector, an assessment to pause rate increases isn’t far-fetched.
Have the Rate Increases Been Successful?
The Fed raised rates at ten consecutive meetings, pushing its benchmark rate to between 5 and 5.25%, and the increases have shown some markers of success. Inflation showed signs of easing at the end of 2022 and the beginning of 2023. And after a strong January, consumer spending slowed sharply in February and March. However, it’s still more than twice as high as the central bank’s target of 2%. After the May 2023 meeting, Fed Chair Jerome Powell told reporters, “We remain strongly committed to bringing inflation back down to our 2% goal.” He added that this will take time, and the Fed is prepared for the possibility of additional rate hikes if such a move is warranted. However, some experts warn that attempting to hammer away at inflation by further increasing rates could put more jobs in jeopardy, without necessarily having a great impact on inflation.
by Daniel Kittell | Accounting News, Financial goals, News
The Federal Reserve recently raised its target federal funds rate by half-a-percentage point, which is the largest interest hike in more than 20 years. This follows an initial quarter-point increase in March. Read on to find out how rising interest rates could impact credit cards, mortgages, auto loans, and savings accounts.
A Delicate Dance to Avoid Recession
Analysts expect more hikes in 2022, taking the federal funds rate to above 2.5% or even 3% by year’s end. The challenge here is raising rates to curb inflation without raising them high enough to trigger a recession. While it will take some time to determine whether rate increases will curb inflation, the effect on your finances could be immediate. Anything from savings account interest to borrowing power to mortgage loans and refinances could be impacted.
Credit Card Interest
Individual banks and financial institutions use the federal funds rate as a starting point to set their own prime rate, or the interest rate passed onto the most creditworthy consumers. Most credit card issuers add several percentage points to the prime rate, so the average credit cardholder can expect their interest rates to be above the prime rate. According to the Federal Reserve, the average interest rate last year was 16.44 percent for cardholders who did not pay off their balance each month. With the latest half percentage point rate hike, an interest rate of 16.44 will increase to 16.94.
If you are carrying credit card debt, think about transferring a high-interest balance to a credit card with a 0% introductory rate. Many cards offer 0% APR for the first 12-21 months. This move will shield you from the rate hikes that are coming down the pipeline while also providing an interest-free path to get that debt paid off for good.
Savings Accounts
While higher interest rates typically raise costs for borrowers, it can mean higher yields for savers. Whether or not rate increases will translate to greater revenue depends on the type of account and can vary from institution to institution. While larger banks already have plenty of deposits, and therefore have little incentive to pay depositors more, smaller banks and credit unions may start raising rates on savings accounts in order to gain new customers. This puts pressure on other institutions to increase their rates, which can cause a domino effect of increasing rates across institutions.
Mortgage Loans
The Federal Reserve does not set mortgage rates, and unlike with savings accounts, the central bank’s decisions don’t impact mortgage rates as directly. However, the mortgage industry as a whole is keenly aware of the Fed, and the industry’s ability to interpret the Fed’s actions means that mortgage rates usually move in the same direction as the federal funds rate. Keep in mind, however, that mortgage rates also react to the ebb and flow of the U.S. and global economies, moving up and down daily. A point worth noting: other types of home loans, like adjustable-rate mortgages and home equity lines of credit, are more in step with the Fed’s move, so these loans will ordinarily move higher the next time an individual loan resets its rate.
Stocks and Bonds
If you are a long-term investor, your portfolio should be built with a balance of both stabilizing (bonds) and riskier (stocks) investments, which means that it should be able to withstand tumultuous periods like this. It’s best not to panic and instead focus on your long-term financial goals regardless of what happens in the short-term.
Car Loans
While car loan rates will increase as the Fed raises interest rates, car buyers need not be concerned because it has a very limited impact on monthly payments. For example, an increase of a quarter percentage point on a $25,000 loan is a $3 increase on monthly payments.
Student Loans
Borrowers who have federal or private student loans with a fixed interest rate won’t be affected by the Fed’s interest rate hikes, but borrowers with variable-rate student loans will see higher monthly payments and total interest charges over the life of the loan.
by Stephen Reed | News, Tax Planning - Individual
Although the market rarely remains consistent for very long, the Federal Reserve’s decision to raise short-term interest rates by a quarter-point recently will come as a shock to many consumer wallets. Considering short-term effects, consumers will see a jump for annual credit card interest rates from 16.5% to 16.75%, as well as a rise in auto and home equity loans, and mortgage rates. Unfortunately though, the short-term effects may not be the cause for concern for consumers; experts seem to think that all signs are pointing to a rise in rates two more times before the year is out, which means the long-term effects could be more detrimental to your wallet. Below is an outline for how exactly the continuing rise in rates could affect your pockets.
Credit Cards
Although the quarter-point increase seems rather small, and rates are still low historically, some may see the effect more than others. If you follow what experts suggest and pay off your entire credit card bill each month, you will obviously be unaffected by any rate changes; however, if you are among the 40% of consumers who don’t pay off their entire bill each month, then you will end up paying an average of $42 more annually, and that number could jump to $85 annually if the Feds increase rates again as is projected.
Auto Loans
While auto loans will certainly see a slight increase from the raise in rates, consumers should not be too worried. Because borrowing rates for the auto industry are fairly low, consumers should only see about a $3 monthly increase on an average $25,000 auto loan.
Mortgages
Even though mortgage rates are not necessarily affected by changes in short-term interest rates, we are still seeing a rise in rates due to higher bond yields. Part of this is due to economic strengthening and potential increases in government borrowing under President Trump, and part is due to the Fed’s objective to tighten monetary policy. Before the election, rates for a 30-year fixed mortgage were at 3.75% compared to where they currently sit at 4.25%. And while the recent rise in interest rates may not be the cause, mortgages will continue to be more costly in the months ahead due to higher bond yields and tighter monetary policy, something that consumers will certainly feel since mortgages are so much larger than most other loans. It may take some time for mortgage rates to increase, but those using home equity lines of credit may feel the effects sooner, adding an average of $6.25 to monthly interest payments on a standard home equity balance.
So, no matter your stage in life, the chances are you will find yourself coughing up a few extra dollars in the coming months, whether that’s on your credit card bill, auto loan, mortgage, or a combination of the three.
