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“Since early last year, the FOMC has significantly tightened the stance of monetary policy,” said Fed Chair Jerome Powell at a June 14 press conference. “We have covered a lot of ground, and the full effects of our tightening have yet to be felt.”
But this latest rate hike pause is uncharted territory. Though inflation has slowed, it still remains higher than the Fed’s 2% target goal, which means there’s still work to be done to reach the goal.
Most experts expected this move, however. “It’s understandable that the Fed would pause the rate increases this month, as there is a growing body of evidence that inflation is cooling in many areas. However, it is certainly not yet under control,” said John Blizzard, president and CEO of Seattle Bank. But more rate hikes are likely in store for 2023. “Though the Fed voted not to increase rates today, there is a consensus in the market that it still may do so in July,”
Below, we’ll unpack what this pause in rate hikes means, when rate hikes may resume, and how you can prepare for what’s next.
Is this the end of the Fed’s rate hikes?
The Fed’s decision to pause rate increases keeps the target federal funds rate at a range of 5.00% to 5.25%. Inflation is now at 4% year over year, according to the latest consumer price index report, significantly lower than June 2022’s record high of 9.1%. Slowly but surely, inflation has been inching downward.
But only time will tell whether the Fed will continue pausing rate hikes or simply skip this month and resume increasing in July. The Fed plans to evaluate different economic factors and determine what to do next. Some experts already predict that the pause will likely end this fall.
“I still think the Fed will resume some pace of hikes, maybe late third or early fourth quarter,” said Stuart Caplan, chief investment officer at Apex Financial Advisors, “The central bank noted in the release that it takes a while for their efforts to ripple through the system, and I like that it is giving some time here to see how things evolve over the summer.” If the Fed resumes rate hikes, we’ll see 25 basis point increases at best, Caplan predicts.
July’s inflation data, as well as unemployment numbers, will likely play a significant role in the Fed’s next move. And if inflation continues trending down, experts warn we’re not out of the woods yet. A recession — albeit likely a milder one — is still likely, which makes now a good time to build up an emergency fund in a high-yield savings account and pay down debt.
Pausing rates this month will give the Fed a three-month period to look at data to make a decision about where rates will go next, said Powell. But there’s still a chance for future rate hikes, since the committee expects the target federal funds rate to reach 5.6% by the end of the year.
“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time,” said Powell.
With rates staying the same for now, but more rate increases probably ahead, here’s what you need to know to make smart financial decisions in the coming months.
Savings accounts will remain at an all-time high, experts say
Some banks have increased interest rates for high-yield savings accounts within the past week, ahead of the Fed’s news. And though the federal funds rate isn’t increasing in June, there’s a chance that banks could push rates higher to remain competitive for deposit accounts — but not by much.
“I would imagine that you won’t see any more increases in interest rates on savings accounts until the next rate hike again,” said Dan Herron, a certified financial planner and founder of Elemental Wealth Advisors.
Regardless of what happens to savings rates next, they’re currently at a record high, with some of the most competitive accounts earning over 4.00% and 5.00% APY. That makes now a good time to set aside money, if you can, while you can still earn a solid return on it. Since prices remain high and experts still predict a mild recession, your savings could prove vital whether inflation persists or the economy slows. Plus, the interest you earn can offer a nice cushion to money you’re already saving.
It’s time to lock in a long-term CD
“From a consumer standpoint, even if the Fed stops raising rates, it remains a great moment for savers,” said Blizzard. For many banks, CD rates are the highest they’ve been in more than 15 years, he added.
Rates for certificates of deposit, or CDs, are experiencing an inverted yield curve, experts say. Normally, long-term CDs, like three- or five-year CDs, have higher APYs than shorter-term CDs, like six-month and one-year CDs. But right now short-term CDs have higher APYs than longer terms, creating this inverted yield curve.
“History tells us that when this happens, it generally means that the longer-term economic outlook is more questionable,” said Blizzard. “So locking in a decent long-term return may be a good choice.”
Most banks aren’t raising rates for long-term CDs, and many experts believe they’re as high as they’re going to get for the next few months. So if you’re considering a long-term CD to give you some extra cash on your savings, now’s the time to compare rates. Since these rates likely won’t change significantly anytime soon, experts suggest locking them in now before rates drop. Otherwise, you may miss out on a better return.
Borrowing will continue to be expensive
Just because the Fed isn’t raising rates right now, it doesn’t mean that rates for personal loans, home equity loans or credit card debt will start going down. In fact, they’ll likely remain high, which means your debt can continue to grow if you aren’t actively working on a strategy to pay it down.
“This decision will likely continue to reduce availability of credit,” said Chelsea Ransom-Cooper, managing partner and financial planning director at Zenith Wealth Partners. If the Fed does raise rates again later this year, rather than lowering them as the market expected, credit conditions will tighten even more, making it harder and more expensive to access credit, she added. As credit card and loan annual percentage rates rose during the past 15 months, many lenders have tightened requirements, making it harder to get approved for a new credit account.
A debt consolidation loan can help consolidate high-interest debt into a lower, fixed-rate loan, while a balance transfer card can offer a respite from interest for a period of time.
More importantly, if you’re taking on new debt, make a plan to pay more than the minimum each month to kick down some of the interest that can accrue. Compare lenders to get the best rate possible. And if you’re looking for a new credit card, make sure not to spend beyond your budget and to pay your bill in full each month to avoid high interest charges altogether. And if you’re one of the millions of people with federal student loan debt preparing for repayment in September, focus on paying off other debts or boosting your savings with a high-yield savings account to get yourself ready for repayment.
Regardless of what the Fed does next, now’s the time to closely examine your finances. For now, experts are urging consumers to beef up their emergency savings and work to pay down any high-interest debt. There’s still plenty of time to take advantage of the high savings rates, but since the cost of borrowing will also remain high, work to pay down any outstanding balances as soon as possible.