What the Federal Reserve’s rate-hike pause means for your money

After more than a year of steady rate hikes, the Federal Reserve held its target federal funds rate steady Wednesday.

For households, however, that offers little relief from record-high borrowing costs.

“It’s not like rates will go down,” said Tomas Philipson, University of Chicago economist and a former chair of the White House Council of Economic Advisers.

In fact, borrowing costs are likely to climb higher in the second half of the year: Fed officials projected another two quarter percentage point moves are on the way before the end of 2023.

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Since March 2022, the central bank has hiked its benchmark rate 10 consecutive times to a targeted range of 5%-5.25%, the fastest pace of tightening since the early 1980s. Inflation has started to cool but still remains well above the Fed’s 2% target.

At the same time, borrowers are paying more on credit cards, student loans and other types of debt.

Wage growth hasn’t been able to keep pace with higher prices for many Americans. As a result, most households are getting squeezed and are going into debt just when borrowing rates reach record highs, Philipson said.

“They are getting hammered,” he added.

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight.

Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day. The Fed’s current benchmark rate is at its highest since August 2007.

Here’s a breakdown of how that affects consumers:

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rose, the prime rate did, as well, and credit card rates followed suit.

Credit card annual percentage rates are now more than 20%, on average — an all-time high. Further, with most people feeling strained by higher prices, more cardholders carry debt from month to month.

For those who carry a balance, there’s not much relief in sight, according to Matt Schulz, chief credit analyst at LendingTree.

“The truth is that today’s credit card rates are likely as high as they’ve been in decades, and they’re probably going to still creep higher in the immediate future, even though the Fed chose not to raise rates this month,” he said.

Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation…