The Federal Reserve is expected to keep interest rates on hold this week at new Federal Reserve Chairman Kevin Warsh’s first policy meeting at the helm, doing little to ease affordability concerns plaguing many American households.
President Donald Trump’s election as central bank chief had previously signaled he would consider lowering interest rates, but experts say the current inflation rate, which is about twice the Federal Reserve’s long-term target of 2%, could make the central bank more likely to consider raising rates.
That would put Mr. Warsh up against Mr. Trump, who has argued that interest rates should be significantly lowered. According to CME’s FedWatch tool, federal funds futures indicate there is virtually no chance of a rate cut at the June meeting.
“Warsh, who is pro-Trump, will likely try to gauge the line between remaining neutral and acknowledging the possibility of rate hikes,” said a June 11 research note from Capital Economics.
The Fed’s moves require a delicate balance, as both high interest rates and high prices can hurt consumers. For now, “Americans should expect interest rates to remain higher than desired for the foreseeable future,” said Matt Schultz, chief credit analyst at LendingTree.
“Trimmed average value”
Economists and policymakers, including outgoing Chairman Jerome Powell, often cite “core” inflation when gauging the trajectory of prices. “Core” measures exclude energy and food prices, which can fluctuate from month to month.
Warsh said during his Senate confirmation hearing in April that he preferred another way to measure the U.S. economy’s underlying inflation: the “trimmed average” (also known as the “trimmed average”).
Broadly speaking, this measure excludes the categories of goods and services that had the most extreme price increases or decreases during the month.
Mark Zandi, Moody’s chief economist, said he assumed these price changes were due to “idiosyncratic factors” easing rather than sustained inflationary pressures.
“I think it’s useful,” Zandi said of the trimmed average. “But I don’t know if it depends. Some things that seem temporary may turn out to be permanent.”
This is an important difference for interest rate policy. Joe Seidle, senior market economist at JPMorgan Private Bank, said the “core” and “trimmed average” metrics are currently sending different signals. He said things are trending in the opposite direction, with core inflation rising and the trimmed average falling.
“Right now is a very good time to take a dovish view,” Seidl said. A dovish view suggests the Fed is leaning toward lowering interest rates.
How the Fed affects your finances
The Federal Reserve sets the interest rate, called the federal funds rate, that banks charge each other for overnight loans. This interest rate affects many consumers’ borrowing and savings rates.
When the Fed raises its benchmark interest rate, it makes borrowing more expensive for consumers and businesses, which could dampen the economy and worsen inflation. Lowering interest rates may stimulate spending and boost the economy, but it also causes prices to rise.
Short-term interest rates, such as credit card rates, generally track closely with the Federal Reserve’s benchmark. Long-term interest rates, such as mortgage rates, are more affected by inflation and other economic factors.
Consumer’s position
For consumers, the direction of monetary policy has a significant impact on household finances.
The prospect of higher borrowing costs could add further economic headwinds to a situation where rising energy costs are already making it difficult for many households to sustain themselves.
“Increasing consumer spending, especially energy-related spending, continues to put pressure on household budgets and contributes to continued financial instability,” said Michele Ranelli, vice president and head of U.S. research and consulting at TransUnion. “These dynamics are expected to further strengthen the K-shaped pattern.”
The K-shape is often used to reflect the diverse economic experiences of consumers. In other words, while high-income households are getting better and better, low-income households are struggling to make ends meet.
The U.S. Congressional Joint Economic Committee estimates that tariffs and the war with Iran will cost households more than $3,100 from 2025 to May 2026, a minority found.
Subscribe to CNBC on YouTube.
