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Interest rates could remain high for much longer. Here’s what it means for your finances
For months, the Federal Reserve foreseen interest rate cuts that would provide much-needed relief to Americans burdened by rising mortgage and credit card loans.
At a press conference this week, however, Fed Chairman Jerome Powell cast doubt about whether these rate cuts would arrive after all, saying the Fed needs to “gain greater confidence” that inflation is headed toward an acceptable level.
The prospect of high interest rates over a longer period of time could exacerbate financial problems already posed by high borrowing costs, making borrowing expensive even as consumers still bear high prices, experts told ABC News.
Americans with savings accounts and other cash funds will continue to benefit from solid returns, although they tend to be wealthy people, experts added.
“Every day, people are suffering the most,” James Cox, a financial advisor and managing partner at Virginia-based Harris Financial Group, told ABC News. “Not only are high interest rates eating up excess income, but inflation is actually killing it on everyday items.”
The Fed decided to hold its benchmark interest rate steady at a meeting on Wednesday, citing a lack of recent progress on price increases. Inflation is down significantly from a peak of 9.1% but remains more than a percentage point above the Fed’s target rate of 2%.
Since last July, the Fed Funds rate has remained between 5.25% and 5.5%, reaching its highest level in more than two decades.
During this time, borrowing costs have risen for everything – from credit cards to student loans to mortgages.
At the end of 2023, Americans held more than $1 trillion in credit card debt, which was a record high, according to one study. report released by the Federal Reserve Bank of New York in February.
As high interest rates persist, credit card borrowers are at risk of rising costs, Jason Taylor, an economics professor at Central Michigan University, told ABC News.
As of Wednesday, average credit card interest rates were a whopping 20.6%, Bank rate data showed.
“Having higher interest rates for a longer period of time will hurt people who have a lot of credit card debt,” Taylor said.
Federal Reserve Chairman Jerome Powell holds a press conference at the end of the Federal Open Market Committee (FOMC) meeting in Washington, DC, on May 1, 2024. Saul Loeb/AFP via Getty Images
Likewise, mortgage rates will likely remain expensive, creating difficulties for potential homebuyers who have faced high borrowing costs for two years.
The 30-year fixed-rate mortgage averaged 7.22% for the week ending Thursday, corresponding to the highest level since November. Freddie Mac data showed.
When the Fed imposed the first rate hike in the current series in March 2022, the average 30-year fixed mortgage was just 3.85%, according to data from Freddie Mac.
“It’s very difficult for a first-time homebuyer to get a property,” Cox said. “It’s very difficult to build the American dream.”
Some people, however, would benefit from an extended period of high interest rates.
The rates directly benefit savers, who stand to gain from an increase in interest generated by accounts held at banks. Wealthier and older Americans tend to hold a greater portion of their assets in savings or other cash funds.
Some high-yield savings accounts offer interest rates in excess of 5%, which far exceeds the 3.5% inflation rate, Nerd Wallet data show.
“Money appears out of thin air, with no risk, which only increases your wealth,” Cox said.
He added: “Interest is like energy – there is an equal and opposite reaction. If you take out a loan, the effect is horrible; if you are a saver, the effect is fantastic.”