Consumers could be looking at higher borrowing costs for many more months.
- Borrowing costs are up due to rate hikes from the Federal Reserve.
- The Fed has no plans to lower interest rates until inflation cools substantially.
On Dec. 14, the Federal Reserve raised its benchmark interest rate 0.5%. That’s a smaller rate hike than the ones we saw over the past four Fed meetings. But it’s a pretty aggressive increase nonetheless.
That news didn’t sit well with investors, though. Many people were hoping for a smaller rate hike in light of recent news that inflation seems to be cooling. In fact, stock values tumbled on the heels of that announcement, leaving many investors with losses in their brokerage accounts.
But as frustrating as another rate hike might be, there’s even more bad news. Federal Reserve chair Jerome Powell announced that while the Fed may not have to implement additional rate hikes in 2023, consumers also shouldn’t expect any rate cuts in the new year. And that means that the cost of borrowing is likely to remain high for the foreseeable future.
A big strain on consumers
The Federal Reserve doesn’t directly set consumer borrowing rates. Rather, it oversees the federal funds rate, which is the rate that banks charge each other for short-term borrowing.
But when the Fed raises its benchmark interest rate, it tends to indirectly drive borrowing costs up. That explains why everything from mortgage rates to auto loan rates to personal loan rates are so much more expensive these days than they were in the past. In fact, mortgage rates are now more than double what they were at the end of 2021.
If the Fed doesn’t cut rates in 2023, consumers can expect the cost of borrowing to remain high. And that’s intentional.
The Fed wants consumers to cut back on spending, because doing so is what’s needed to help bring inflation levels back down to a more moderate level. But the Fed may have lofty expectations in that regard.
On Dec. 14, Powell was quoted as saying, “Our focus right now is really on moving our policy stance to one that’s restrictive enough to assure a return of inflation to 2% goal over time.” But right now, the rate of inflation isn’t anywhere close to 2%. The most recent Consumer Price Index reading showed an annual rise of inflation to the tune of 7.1%. And that was a notable improvement from October.
Since we’re worlds away from 2% inflation, we could also be in for many more months of expensive borrowing rates until the Fed gets what it wants. And that’s something consumers need to be aware of.
It could pay to hold off on borrowing
Consumers who need a loan to buy a car or repair a home may not be able to wait. But those looking to borrow for purposes like renovating may want to sit tight for a while. Right now, signing any type of loan means getting stuck with a less-than-competitive interest rate. And there’s no reason to land in that situation if you can avoid it.
On the plus side, the Fed’s recent rate hikes have led to higher interest rates for savings accounts and certificates of deposit. So while consumers may be paying more to borrow, they’re also getting paid more to sock their money away in the bank.
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