The Federal Reserve is shaking things up – which is good and bad news for consumers.
The Fed made some of the biggest changes to its policy in the years following the expanded review. The central bank has revised its outlook on inflation and the labor market which may enter an extended period of lower interest rates.
But the new approach will not mean that consumers will save money across the board. “The Federal Reserve’s new strategy can divide the landscape for different financial products that are important to consumers,” said Lynn Riser, chief economist at the Fermian Business and Economic Institute at the University of Point Lama Nazrin.
Here’s how the Fed’s new policy will affect Americans’ finances:
What changes did the Fed make?
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 after a stretch with low inflation, the Fed may allow inflation to run more than 2%.
Along these lines, the Fed will be less concerned with the strength of the labor market. “A tight labor market is no longer associated with inflation,” said Dan Geller, a behavioral economist and founder of consulting firm Analyticom.
In the past, the Fed’s official view was that a strong labor market could cause inflation to jump – as a result, the central bank would move to raise rates even if high levels of inflation were still strong in the physical market Be physical.
The new policy will allow the Fed to keep rates low even if the job market discounts and raises inflation. As a result, some have suggested that it may be many, many years before the central bank hikes rates again.
Americans will save on credit-card interest due to new Fed policy
The good news for any Americans with a credit card is that the annual percentage rate on your card should be lower – or lower-lived – for the future.
“Card APRs are still high, but they are actually the lowest they have been for years, largely thanks to the Fed,” said Matt Schulz, chief credit analyst at LendingTree Tray,
“Their latest announcement means that rates are likely to remain low for some time.”
The same is true for other forms of short-term debt, including domestic equity lines of credit and certain personal loans. On short-term loans such as these, the bulk of the movement in interest rates is tied to changes in the federal funds rate, which is the interest rate used by commercial banks to take or reserve loans to each other.
The federal funds rate is the criterion for these forms of debt. Earlier this year, the Fed cut the federal funds rate twice, causing interest rates to fall on several forms of consumer debt.
“The Fed is not the only factor that affects credit card interest rates, but in recent years, it’s certainly the largest,” Schulze said. “The truth is that for most of the last decade, credit card APRs have not outgrown everyone, except when the Fed raised or lowered rates.”
In the case of credit cards, a lower rate is not necessarily a cheaper one. The average credit card APR currently stands at 16.03%, well above the rates seen for other loan products such as mortgages or auto loans. CreditCards.com industry analyst Ted Rossman, down 17.68% from a year ago, but that’s only $ 8 a month in savings for someone making a minimum payment toward the average credit card debt (which is $ 5,700 according to the Fed) .
“That’s why the credit-card debtor shouldn’t expect the Fed to ride to its rescue,” Rossman said. “Paying off credit card debt as soon as possible is really important, because the rates are so high.”
Your savings account may not generate that much income in the future
The interest earned through high yield savings accounts and certificates of deposit is dependent on the Fed’s interest rate policy. As such, these savings vehicles will not generate large amounts of interest income as long as the Fed maintains its low rate stance amid low inflation.
If inflation rises, banks can charge more on these accounts, however, Geller said.
Mortgage rates may actually rise even though the Fed keeps rates low
“Very little will be affected by this policy change in long-term interest rates,” Reaser said. And this includes mortgage rates.
Mortgage rates do not directly respond to the Fed’s move because the Fed only controls short-term interest rates. Instead, the yield on mortgages and flow rates, particularly the 10-year Treasury note TMUBMUSD10Y, in response to movements in the long-term bond market
. Therefore, mortgage rates are subject to the whims of bond investors.
“If investors fear that the Federal Reserve may be too late to respond to any buildup under inflationary pressures, then long-term rates could be higher,” Racer said. This logic does not just apply to 30- and 15-year mortgages, but is also long-term for personal loans and student loans.
The Fed may take some action that will keep mortgage rates low.
Leddingtree Chief Economist Tenday Kafidis said, “The Fed’s over-aggressive may mean they are buying more mortgage-backed securities and funds, which could have an impact on the inflation rate for things like mortgages.” . ”