The Federal Reserve announced that it’s holding interest rates steady following its Jan. 30-31 meeting, leaving the federal funds rate at a target range of 5.25 to 5.5 percent. It’s the fifth time in the last six meetings that the Fed has left rates unchanged, though the central bank has raised rates a total of 11 times during this economic cycle in an effort to tamp down high inflation.
The Fed’s decision comes as inflation hit 3.4 percent year-over-year in December, after reaching the highest levels in decades at over 9 percent in mid-2022. The last time the Fed raised rates was at its July 2023 meeting. With only one hike in the past six meetings and the Fed’s statement in December that it expects to lower rates this year, consumers should expect rates to decline.
“The ‘soft-landing’ economic scenario – where inflation comes down without sacrificing the economic expansion – is increasingly coming into view and recent economic data validates that,” says Greg McBride, CFA, Bankrate chief financial analyst. “We’re getting closer to the point where the Fed will be comfortable trimming interest rates. It won’t be March, but could be soon thereafter if data continue to trend in the right direction.”
At about 3.96 percent, the 10-year Treasury note is down substantially from its 52-week high of 4.99 percent, which was hit in October. The yield plummeted at the end of 2023, but has picked up as Fed officials talked back the timeline in 2024 for lowering rates and the market pushed out its expectations for the move.
Here are the winners and losers of the Fed’s latest decision.
1. Savings accounts and CDs
The Fed’s multi-month pause on adjusting interest rates has meant that many banks have also paused changing rates on their savings, CDs and money market accounts, while many others have been actively paring them back in anticipation of the Fed lowering rates in the future.
“If your money is in high-yield savings accounts and CDs, this will be another good year as your safe investments earn notably more than inflation,” says McBride. “But the numbers will look different as interest rates and inflation both come down.”
Savers looking to maximize their earnings from interest should consider turning to online banks or the top credit unions, where rates are typically much better than those offered by traditional banks.
When it comes to CDs, account holders who recently locked in rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.
With rates likely to be nearing a top, it may be a good time to lock in longer maturities on CDs, especially those in the 2-year to 5-year timeframe while they remain relatively high.
“If you’ve been considering a CD, now is the time to lock in as those yields have peaked and begun to ease back,” says McBride. “There is no benefit to waiting because you won’t find a higher yield by waiting.”
2. Mortgages
While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield falling to end 2023, mortgage rates have gone along for the ride and dropped quickly.
“After hitting 8 percent [annual percentage rate] in October 2023, mortgage rates are now under 7 percent and should trend lower as 2024 unfolds,” says McBride. “We could end the year with mortgage rates below 6 percent. We’re not going back to 3 percent mortgage rates like 2021, but mortgage rates will look a whole lot better than what was seen just a few months earlier.”
Mortgage rates remain well above where they were a year ago, and this – following the rapid rise in housing prices over the past couple of years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.
The cost of a home equity line of credit (HELOC) should remain flat since HELOCs stay aligned with changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers. Those with outstanding balances on their HELOC will likely see rates stay close to where they are currently, but it can still be a good time to shop around for the best rate.
3. Stock and bond investors
The stock market soared as long as the Fed kept rates at near zero for an extended period of time. Low rates were beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed-income investments such as CDs.
Now with the 10-year Treasury yield off its 52-week highs and expectations of a lower Fed funds rate in the near term, investors have become more enthusiastic about stocks in the last couple of months.
Since 2022, higher rates have hit bonds hard, and the longer the bond’s maturity, the more it’s been stung by rising rates. However, with a rate pause and investors anticipating the Fed to lower rates soon, those putting new money into bonds should like what they’re seeing. Accordingly, the bond market has rallied strongly since October, though it’s given back some of those gains in January.
“A soft landing is great news for bond investors as economic expansion keeps the risk of bond defaults at bay while lower rates pump up bond prices, a notable reversal from 2022 and 2023,” says McBride.
As rates fall again, bond investors will benefit as bond prices move higher. But with the economy yet to endure a recession, stock investors may still be in for a choppy ride.
“For stock investors, continued economic expansion is conducive to the profit growth that ultimately drives stock prices higher,” says McBride. “Already lofty valuations may keep a lid on how much further appreciation we see this year.”
Short-term rates remain attractive if you’re looking for a safe place to stash money while waiting for things to cool off.
4. Borrowers
If you’re an existing borrower and don’t need to tap the market for money – say, you previously locked in a 30-year fixed-rate mortgage in 2021 or 2022 – you’re in good shape. But even with the rate pause, everyone else who’s looking to access new credit is still squeezed, whether that’s credit cards (more later), student loans, personal loans, auto loans or whatever else you might need to borrow for.
The average interest rate on personal loans is 11.56 percent APR, as of Jan. 6, according to a Bankrate analysis, so the rate pause will likely slow upward pressure on rates there. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent APR, when the fed funds rate was near zero.
Besides these new borrowers, however, anyone with floating-rate debt is breathing a sigh of relief with the Fed’s decision. Still, you may have an older loan that’s resetting at this year’s higher rates. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates and it may be pushing up your monthly payment, just not as high as it would be if the Fed had raised rates.
5. Credit cards
Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards should remain more or less steady for now. Rates on cards are already at multi-decade highs and have risen as the Fed sharply raised rates.
“Prioritize repaying high-cost credit-card debt and utilize a zero percent or other low-rate balance-transfer offer to give those debt repayment efforts a tailwind,” says McBride. (Here are some of the top balance-transfer cards to consider.)
Rates on credit cards are largely a non-issue if you’re not running an ongoing balance.
6. The U.S. federal government
With the national debt passing $34 trillion, a pause in rising rates will at least temporarily relieve some pressure on the borrowing costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.
As long as inflation remained higher than interest rates, the government was slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt. Now, with interest rates higher than inflation, the tables have turned, and the government is repaying debt with today’s more costly dollars.
With 2024 being an election year, the surging debt and its high carrying cost may impact the re-election prospects of President Joe Biden in a likely rematch with former President Donald Trump.
Bottom line
Inflation ran hot over the last couple of years, but with already-high rates and a clear cooling in inflation, the Fed has decided to leave rates steady for now. Smart consumers can take advantage, for example, by being more discriminating when it comes to shopping for rates on savings accounts or CDs. It can be a good time to lock in longer-term rates on CDs or even get a good balance-transfer credit card.
