The Fed will keep interest rates unchanged. Impact on your wallet

The US Federal Reserve left interest rates unchanged on Wednesday, but the central bank’s latest policy decisions could still have a significant impact on household finances.

Economists said the Fed likely decided to keep interest rates on hold as policymakers assess the economic impact of higher energy prices stemming from the Iran conflict, which could have long-term inflationary effects. The dynamic could also lead policymakers to consider raising interest rates when they meet in September, even though President Donald Trump has said the U.S. “should have the lowest interest rates in the world.”

Eugenio Aleman, chief economist at Raymond James, said of new Fed Chairman Kevin Warsh: “It’s very difficult to read his thoughts and get his views on the future direction.”

But with affordability pressures already mounting, any move to raise interest rates would increase borrowing costs for consumers. “Consumers are going to continue to be stressed, and if they start raising interest rates, it’s going to get even worse,” Aleman said.

The Federal Reserve influences the federal funds rate, an interest rate benchmark that sets the amount banks charge each other for overnight loans. It also affects both consumer borrowing rates and savings rates.

Short-term interest rates on consumer debt are generally pegged strictly to the prime rate, which is typically 3 percentage points higher than the federal funds rate. Long-term interest rates are largely determined by inflation expectations and other economic factors.

For example, most credit cards have variable interest rates, which are directly tied to the Fed’s overnight rate.

According to LendingTree, average interest rates on new credit cards have hovered near 24% in recent months as Fed metrics have held steady.

“Anyone who was hoping the Fed would step in and cut interest rates will almost certainly be disappointed,” said Matt Schultz, chief consumer finance analyst at LendingTree.

Experts say auto loan interest rates, which are fixed for the life of the loan, remain high due in part to the Federal Reserve’s benchmark. The average interest rate on a six-year loan for a new car is currently 7%, while the average auto loan interest rate on a used car is 10.5%, Edmunds said.

“If rates are left on hold again…easing is not on the horizon,” said Jessica Caldwell, head of insights at Edmunds.

But Caldwell said the real impact is seen in fewer people being able to buy new cars.

“Car manufacturers have not been able to offer a wide range of zero-percent financing deals because interest rates remain high,” he said. “That high interest rate floor is driving middle- and low-income buyers increasingly priced out of the new car market, shifting sales to higher-income buyers who can absorb the costs.”

Interest rates on federal student loans are also fixed for the life of the loan, giving most borrowers some protection from Fed moves. However, based on the previous 10-year Treasury auction in May, interest rates for new borrowers will rise over the next year.

Similarly, 15-year and 30-year fixed mortgage rates do not directly track the Fed’s benchmark rate, but they also follow the lead of the long-term Treasury rate. Mortgage rates are already hovering near one-year highs amid renewed tensions between the United States and Iran, according to Mortgage News Daily. As of July 28, the average interest rate on a 30-year fixed-rate mortgage was 6.76%.

“It may take either inflation to be lower than expected again or unemployment claims to rise for mortgage rates to break below their current range,” said Jeff Dergrahian, chief investment officer and chief economist at LoanDepot.

Savings rates tend to correlate with changes in the target federal funds rate. According to Bankrate, savings deposit yields have remained mostly stable due to the Fed’s policy of holding interest rates unchanged, but some high-yielding online savings accounts can offer above-average returns, currently yielding about 4%.

“It’s still a good time to save,” Schultz said. “While (certificate of deposit) rates and high-yield savings account rates are down from their peaks several years ago, they remain strong by historical standards and are likely to remain so for some time.”

Economists say the Fed’s most important impact for many households is to try to control inflation.

If higher interest rates stabilize prices, consumers may be able to more easily cover everyday expenses such as food and clothing.

But in the meantime, higher borrowing costs could create financial strain. Research shows that paying off high-interest debt, negotiating loan terms, and earning interest income on savings can go a long way in relieving these budgetary strains.

“You have more control over interest rates than you realize, and your actions can have a far greater impact than anything the Fed might do,” Schultz said. “When looking for a new loan or refinancing your current loan, taking the time to shop around and compare interest rates can lead to big savings.”

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