What the Federal Reserve’s expected interest rate pause means for you

The Federal Reserve is likely to temporarily pause its aggressive interest rate hikes when it meets next week, experts predict. But consumers may not see any relief.

The central bank has raised interest rates 10 times since last year — the fastest pace of tightening since the early 1980s — only to see inflation stay well above its 2% target.

“We are living in uncharted territory,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion. “The combination of rising interest rates and elevated inflation, while not uncommon from a historical perspective, is an unfamiliar experience for many consumers.”

“A pause is not going to make things better,” he added.

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Although the Fed’s rate-hiking cycle has started to cool inflation, higher prices have caused real wages to decline. That’s squeezed household budgets, pushing more people into debt just when borrowing rates reach record highs.

Even with a pause, “interest rates are the highest they’ve been in years, borrowing costs have gone up dramatically and that isn’t going to change,” said Greg McBride, chief financial analyst at Bankrate.com.

Here’s a breakdown of how the benchmark rate has already impacted the rates consumers pay:

The federal funds rate, which is set by the U.S. 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.

For starters, most credit cards come with a variable rate, which has a direct connection to the Fed’s benchmark rate.

Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rose, the prime rate did, as well, and these rates followed suit.

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans.

Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But as of July, undergraduate students who take out new direct federal student loans will see interest rates rise to 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.

While the Fed has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.4%, on average.