The Fed Takes a New Approach to Inflation: What It Means for Your Savings, Your Credit Card Interest, and Your Mortgage Rate

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The Federal Reserve is shaking things up – which is both good news and bad news for consumers.

The Fed has made some of the biggest policy changes in years following a thorough review. The central bank has revised its approach to inflation and the labor market in a move that could usher in a prolonged period of low interest rates.

But the new approach doesn’t mean consumers will save money across the board. “The Federal Reserve’s new strategy could divide the landscape of various financial products important to consumers,” said Lynn Reaser, chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University.
Here’s how the Fed’s new policy will affect Americans’ finances:

What has the Fed changed?

The Fed is now officially less concerned about high inflation. Going forward, central bankers will aim for an average inflation of 2% over time. This means that following a stretch with low inflation, the Fed could let inflation go above 2% for a while.
In this sense, the Fed will be less concerned about the strength of the labor market. “A tight labor market is no longer correlated with inflation,” said Dan Geller, behavioral economist and founder of consulting firm Analyticom.
In the past, the official view of the Fed was that a strong labor market could drive inflation up – as a result, the central bank would move to raise rates even if higher levels of inflation did not materialize. not yet when the labor market was particularly strong.
The new policy will allow the Fed to keep rates low even if the labor market rebounds and inflation picks up. As a result, some have suggested that it may be many years before the central bank hikes rates again.

Americans to Save Interest on Credit Cards Thanks to New Fed Policy

The good news for all Americans with credit cards is that the annual percentage rate on your cards is expected to drop – or stay low – for the foreseeable future.
“Card APRs are still high, but they’re actually the lowest in years, thanks in large part to the Fed,” said Matt Schulz, chief credit analyst at LendingTree TREE,
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“Their latest announcement means rates are expected to stay low for some time.”
The same is true for other forms of short-term debt, including home equity lines of credit and some personal loans. In the case of short-term loans like these, most of the movement in interest rates is linked to changes in the federal funds rate, which is the interest rate used by commercial banks to borrow or lend. reserves between them.
The federal funds rate is the benchmark for these forms of debt. Earlier this year, the Fed cut the federal funds rate twice, which resulted in lower interest rates on many forms of consumer debt.
“The Fed isn’t the only factor influencing credit card interest rates, but in recent years it has certainly been the most important,” Schulz said. “The truth is, for most of the past decade, credit card payment rates haven’t changed much except when the Fed raised or lowered rates.”
In the case of credit cards, a lower rate does not necessarily mean an affordable rate. The average APR for credit cards is currently 16.03%, well above the rates seen for other loan products like mortgages or auto loans. That’s down from 17.68% a year ago, CreditCards.com industry analyst Ted Rossman said, but it’s only $ 8 in savings per month for someone making payments. minimums on average credit card debt (which is $ 5,700 according to the Fed.)
“That’s why credit card debtors shouldn’t expect the Fed to come to their rescue,” Rossman said. “It’s really important to pay off credit card debt as soon as possible because the rates are so high.”

Your savings account may not generate as much income in the future

Interest earned through high yield savings accounts and certificates of deposit depends on the Fed’s interest rate policy. As such, these savings vehicles will not generate significant interest income as long as the Fed maintains its low rate stance amid low inflation.
If inflation rises, however, banks could increase interest on those accounts, Geller said.

Mortgage rates could actually rise even if the Fed keeps rates low

“Long-term interest rates will be much less affected by this policy change,” Reaser said. And that includes mortgage rates.
Mortgage rates do not react directly to Fed moves because the Fed only controls short-term interest rates. Instead, mortgage rates fluctuate in response to movements in the long-term bond market, especially the yield on the 10-year T-bill TMUBMUSD10Y,
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. As a result, mortgage rates are more subject to the whims of bond investors.
“If investors are concerned that the Federal Reserve is too late to respond to any increase in inflationary pressures, long-term rates could be higher,” Reaser said. This logic doesn’t just apply to 30- and 15-year mortgages, but also to long-term personal loans and student loans.
There are steps the Fed can take to keep mortgage rates low, however.
“The Fed being more dovish could mean it is buying more mortgage-backed securities and Treasuries, which could counteract the inflationary effect on longer rates for things like mortgages,” Tendayi said. Kapfidze, chief economist at LendingTree.

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