What Does a Pause in Interest Rate Hikes Mean for Your Wallet?

Powell announces pause in interest rate hikes, Washington, USA - 14 Jun 2023
JIM LO SCALZO / EPA-EFE / Shutterstock.com

Following 10 consecutive rate hikes — and as was widely anticipated — the Federal Reserve finally skipped an additional increase following its two-day Federal Open Market Committee (FOMC) meeting. The unanimous June 14 decision comes a day after a reassuring consumer price index (CPI) report, which showed inflation cooled down to 4% in May.

“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” Fed officials said in a statement, noting that “inflation remains elevated.”

The FOMC added in the statement that it decided to maintain the target range for the federal funds rate at 5% to 5-1/4%.

In the projections material, however, officials note they anticipate two more increases this year — to as high as 5.6% — while also raising expectations for inflation. This news sent markets downward post-announcement.

In a press conference, Fed chair Jerome Powell confirmed that Fed officials expect further tightening this year, as getting inflation back to the 2% target “has a long way to go.” He added that officials judged it “prudent” to hold the rates steady at this meeting. However, he also said that the decision to pause hikes is for “this meeting” only: “We didn’t make a decision about the July meeting.”

Asked why officials chose a pause instead of “ripping the band-aid and continue to hike rates,” Powell said the decision made sense “as we get closer to our destination.”

Make Your Money Work for You

This demonstrates that the Fed is still far from a clear pivot, something that Gargi Chaudhuri, head of iShares Investment Strategy Americas at BlackRock, instead deemed a “hawkish skip.” Said skip is “keeping the door open for a potential rate hike in the future,” per Chaudhuri.

“People expected a hawkish pause and they got a very hawkish pause. Given the strong labor market, the Fed has room to crush inflation and they don’t want to miss their chance,” said David Russell, vice president of market intelligence at TradeStation. “Still, policymakers skipped hiking rates so they can monitor the data. This increases the importance of each incremental economic report. More good news like this week’s CPI and PPI could let traders look past the Fed’s tough talk and see a dovish turn later in the year.”

So, while it remains to be seen what happens in months to follow, for June at least, borrowers could see somewhat of a stabilization of rates across a range of industries — in particular, mortgage and credit card industres, said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.

What Does it Mean for Your Wallet?

In the mortgage market, Transunion’s Raneri said that consumers may be buoyed by the news that interest rates are holding steady, at least for now, at a time where a $300,000, 30-year 6.8% fixed rate mortgage sees monthly payments in the range of $1,956. This is quite the climb upward from $1,297 at the 3.2% rates seen in January 2022.

Make Your Money Work for You

“However, it remains to be seen if, in the short term, this will spur many who have been holding off to finally engage in a new purchase or refinance, or if they will continue waiting until rates begin dropping,” said Raneri.

As for credit cards, Ted Rossman, senior industry analyst at Creditcards.com, said the pause means rates could plateau at a high level for a while.

“Right now, credit card rates are at their highest point ever, mortgage and home equity line of credit rates are at their highest level in nearly two decades and car loan rates are higher than they’ve been in more than a decade,” he said. He added that, in some respects, it doesn’t matter all that much if your rate is 21% or 20% or 19% — they’re all high.

Rossman also noted that there’s also the important distinction between fixed and variable-rate debt. If you have an existing fixed-rate mortgage or car loan, you’re insulated from these rate increases — although they could be an impediment to making a new purchase.

“But for something like a credit card or a home equity line of credit, which tend to have variable interest rates, a lot of damage has been done over the past 15 months,” he added.

Raneri echoed this sentiment, saying that while the skip means interest rates may not rise again this month, the high credit card interest rates consumers are currently seeing are not about to disappear.

“In fact, interest rate increases since March 2022 translate to a 5.0% increase in the Prime Rate. Based on the current average total card balance per consumer of $5,800, this translates to an additional $290 of annual card interest rate charges per consumer,” Raneri explained.

Make Your Money Work for You

Finally, Raneri added that with the summer travel season getting underway this month, consumers should continue to use credit diligently when they can. They should also do so with the continued understanding that, even if interest rates do not rise this month, they may very well increase again in the future.

“And as interest rates rise, so do minimum credit card payments. Consumers should ensure they are able to make those payments that come through their use of credit in order to avoid delinquency,” added Raneri.

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