News Summary
As widely expected, the Federal Reserve kept the U.S. interest rate unchanged on Wednesday. The rate currently stands at its highest level in 22 years, remaining unchanged since July, which puts upward pressure on all types of loans including credit cards, auto loans, and mortgages. Economic forecasts indicated that Federal Reserve officials expect to lower the U.S. interest rate by 0.75 percentage points next year, compared to the 1.25 percentage point decrease anticipated by the markets.
Latest Update
In a significant turn, the Federal Reserve indicated that its campaign of interest rate hikes to combat inflation is likely over. The Fed kept its key interest rate unchanged on Wednesday where it has been since July, at its highest level since 2001. The Federal Open Market Committee (FOMC) decision, which was widely expected, maintains the U.S. interest rate in the range of 5.25% to 5.5%. Unlike previous communications, Federal Reserve officials also indicated that they do not expect to raise rates higher in their efforts to bring inflation down to an annual rate of 2%.
Impact of the U.S. Interest Rate
The U.S. interest rate affects loan interest rates across the economy, and the 11 increases in the interest rate implemented by the Federal Reserve over the past year and a half aimed to curb inflation by keeping borrowing costs high and slowing the economy enough, but not to the extent of causing a recession. Consumer and business borrowing costs have been notably affected by these hikes; for example, previously cheap home loans have become a painful financial proposition for the few buyers who can afford them.
Expectations for Interest Rate Cuts
Inflation has dropped significantly in recent months, although a report this week showed that inflation eased slightly in November. This caused interest rates on some loans, including mortgages, to fall since the end of October due to traders’ expectations of a shift in the Federal Reserve’s stance and the beginning of rate cuts in March 2024.
Impact of Interest Rate Cuts on Borrowers and Savers
The Federal Reserve’s signal of rate cuts affects both borrowers and savers. This year, high yields were offered to depositors on certificates of deposit and high-yield savings accounts, but these days may soon be coming to an end. It is advisable for savers to lock in the current high interest rates and other rates in safe instruments like treasury bonds. These rates are likely to decline from now on, and since they are above the inflation rate, savers can achieve real returns at present.
Conclusion
The markets reacted to the Federal Reserve’s decision not to raise interest rates and its indication of potential cuts in the future. This decision may bring some relief to prospective buyers waiting for lower mortgage prices. Furthermore, the Federal Reserve’s signal for lower interest rates has implications for both borrowers and savers. There may be an impact on the interest rates offered for deposits and high-yield savings accounts this year. However, this period may soon end, and it might be best for savers to secure the current high rates before they drop.
Sources
Investopedia. “Federal Reserve Issues FOMC Statement.”
CME Group. “FedWatch Tool.”
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