The Federal Reserve is shaking things up – which is good and bad news for consumers.
The Fed made some major changes to its policy over the years following an extensive review. The central bank has improved its approach to inflation and the labor market, leading to lower interest rates.
But the new approach doesn’t mean customers will save money across the board. “The Federal Reserve’s new strategy could share the landscape for consumers with a variety of important financial products,” said Lynn Racer, chief economist at the Firmian Business and Economic Institute at Point Loma Nazarene University.
Here’s how the Fed’s new policy will affect American finances:
What has changed in the Fed?
The Fed is now officially less concerned about high inflation. Going forward, central bankers will target an average of 2% inflation over time. This means that following a pullback with lower inflation, the Fed will allow inflation to run above 2% for the period.
With these lines, the Fed will worry less about the strength of the labor market. “The tight labor market is no longer about inflation,” said Dan Geller, a behavioral economist and founder of consulting firm Analytics.
In the past, the Fed’s official view was that a strong labor market could push up inflation – as a result, even if inflation levels were not yet met when the job market was particularly strong, the central bank would raise rates.
The new policy will allow the Fed to keep rates low, even if the job market improves and inflation rises. As a result, some have suggested, it could be many, many years before the central bank raises rates again.
Americans will save on credit-card interest because of the Fed’s new policy
The good news for any American with a credit card is that the annual percentage rate on your cards should be – or lower, for the foreseeable future.
“Card APRs are still high, but they’re actually the lowest in years, thanks in large part to the Fed,” said Matt Schulz, chief credit analyst at Landtree Tree.
“Their latest announcement means rates are likely to remain low for some time.”
The same is true for other forms of short-term debt, including a line of home equity credit and some personal loans. On short-term loans like these, most of the interest rate movements are linked to changes in the federal funds rate, the interest rate used by commercial banks to lend or lend reserves to each other.
The federal funding rate is the benchmark for this type of debt. Earlier this year, the Fed cut interest rates on federal funds twice, leading to lower interest rates on many forms of consumer debt.
“The Fed isn’t the only factor that affects credit card interest rates, but in recent years, it’s definitely been the biggest,” Schulz said. “The truth is that for most of the last decade, credit card APR hasn’t moved much, except the Fed has raised or lowered rates.”
In the case of credit cards, a lower rate does not mean that it is cheaper. The average credit card APR is currently 16.03% higher than rates for other loan products such as mortgages or auto toe loans. Creditcards.com industry analyst Ted Rossman said it was down 17.68% from a year ago, but the average credit card toward someone making a minimum payment is only 8 8 a month in savings (which is, 5,700 according to the Fed).
“This is the reason why credit card borrowers should not expect the Fed to move forward in their defense,” Roseman said. “It’s really important to pay off your credit card debt as soon as possible because the rates are so high.”
Your savings account may not generate as much revenue in the future
The interest earned through high yield savings accounts and certificates of deposit is based on the Fed’s interest rate policy. As such, these savings vehicles will no longer generate large amounts of interest income as the Fed maintains its low-rate trend amid low inflation.
If inflation rises, banks may raise interest rates on these accounts, however, Galler said.
Even if the Fed keeps rates low, mortgage rates could actually rise
“Long-term interest rates will be much less affected by this policy change,” Riser said. And that includes mortgage rates.
Mortgage rates do not respond directly to the Fed’s part because the Fed only controls short-term interest rates. Instead, mortgage rates decline in response to movements in the long-term bond market and yields, especially yields on the 10-year Treasury note TMUBMUSD10Y,
. Therefore, mortgage rates are more subject to the whims of bond investors.
“If investors fear that the Federal Reserve may be late to bring about an improvement in inflationary pressures, long-term rates could be higher.” This logic applies not only to 30- and 15-year mortgages, but also to long-term personal loans and student loans.
The Fed may take some actions that reduce mortgage rates.
“The Fed’s more favorable may mean that they are buying mortgage-backed securities and treasury that could withstand the impact of inflation on long-term rates for things like mortgages,” said Tendai Kfidz, chief economist at Lendingtree.
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