Fed Holds Steady on Interest Rates: Who Wins and Loses?

interest rates

The Federal Reserve recently confirmed that interest rates will remain unchanged, maintaining a federal funds rate of 5.25% to 5.5%. This follows 11 rate hikes aimed at curtailing high inflation and tightening financial markets. But who benefits and who gets the short end of the stick? Let’s dive in.

The Fed made this decision against a backdrop of declining inflation, which settled at 3.7% year-over-year in August, down from a peak of over 9% in mid-2022. Experts suggest that another rate hike might still happen this year if conditions warrant it.

The 10-year Treasury note’s yield is nearing its 52-week high, which has seen a spike in recent weeks. This indicates that investors are demanding greater returns for holding government bonds.

The Impact on Savings and CDs

Static interest rates suggest that banks might hesitate to increase returns on savings and money market accounts. However, online savings accounts and top-yielding Certificates of Deposit (CDs) are still worth considering for better rates. Now might also be the right time to lock in longer-term CDs while rates remain relatively high.

Mortgages: The Double Whammy

Although the federal funds rate doesn’t directly influence mortgage rates, the latter have been on an upward trajectory due to rising 10-year Treasury yields. Add that to the increase in housing prices, and homebuyers are facing a tough market. Meanwhile, Home Equity Line of Credit (HELOC) rates should remain stable.

Stock and Bond Markets: Uncertainty Abounds

With Treasury yields at yearly highs, the stock market has been less attractive. High interest rates could potentially stifle corporate growth. On the flip side, bond prices seem to have found a floor, which is good news for new bond investors.

Borrowers: A Sigh of Relief, but Caution

Those with existing loans like fixed-rate mortgages from 2021 or 2022 are in a decent spot. However, those seeking new credit will find it more costly, especially with average personal loan rates at around 11.31% APR as of mid-September.

Credit Cards: Steady but High

Credit card rates are expected to stay the same, but they’re already at multi-decade highs. Now would be a good time to consider zero-percent or low-rate balance-transfer offers.

US Federal Government: A Temporary Reprieve

A pause in rate hikes offers the federal government some relief in terms of borrowing costs, given the staggering $33 trillion national debt. However, higher interest rates mean the government is repaying its debt with today’s more expensive dollars.

Final Thoughts

While inflation has cooled off recently, the Fed’s decision to hold rates steady can offer savvy consumers some opportunities. Whether it’s shopping for better savings rates or considering balance-transfer credit cards, now could be a good time to make some financially strategic moves.

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