The Fed Left Interest Rates Alone, but the Economy Is Still a Mess
As if there wasn’t already enough bad news about the economy: Interest rate cuts aren’t happening this week.
The Federal Reserve, the US central bank, left interest rates alone for the second consecutive time at today’s meeting, stating once again that it will monitor labor market conditions, inflation pressures and international developments. Put simply, there’s too much uncertainty over the impact of the Trump administration’s economic agenda, from trade wars to government slashing, to make any major policy moves.
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If you’ve tried to finance a car, take out a home loan or pay down credit card debt in the last few years, you probably noticed that interest rates are high. Since the Fed cut rates three times in 2024, many of us hoped for cheaper borrowing costs. But a lot has changed since last year.
US households are curbing spending amid fears of a looming recession. Economists are concerned that tariffs will unleash more inflationary pressures. Investors are cutting their losses in a plunging stock market. There’s wide-ranging concern over jobs, taxes, prices, social programs and just about everything else that affects our financial livelihoods.
“The Fed is watching the data, but consumers are watching their bank accounts,” said Nicole Rueth, SVP of the Rueth Team Powered by Movement Mortgage.
While central bankers held firm on the decision to keep the federal funds rate at its current range of 4.25% to 4.5% on Wednesday, the outlook is likely to shift in the coming months. The Fed’s future decisions about interest rates impact how much we earn from our savings accounts, how much we owe for carrying debt and whether we can afford a monthly mortgage payment.
Read more: Trump Can’t Lower Interest Rates. But What Power Does the President Have Over the Fed?
How the Fed determines interest rates
The Fed meets eight times a year to assess the economy’s health and set monetary policy, primarily through changes to the federal funds rate, the benchmark interest rate US banks use to lend or borrow money overnight.
Imagine a situation where the financial institutions and banks make up an orchestra, and the Fed is the conductor, directing the markets and controlling the money supply. Although the Fed doesn’t directly control the percentage we owe on our credit cards and mortgages, its policies have a ripple effect on the everyday consumer.
Interest is the cost you pay to borrow money, whether that’s through a loan or credit card. When the central bank “maestro” increases interest rates, many banks tend to follow. This can make the debt we’re carrying more expensive (a credit card APR of 22% versus 17%), but it can also lead to higher savings yields (an APY of 5% versus 2%).
When the Fed lowers rates, banks tend to drop their interest rates too. Cheaper borrowing costs encourage investment and make debt payoff slightly less cumbersome, but we won’t get as high a yield on our savings.
Why the Fed held interest rates steady
Financial experts and market watchers spend a lot of time predicting whether the Fed will hike or cut interest rates based on official economic data, with a special focus on inflation and the job market. That’s because the Fed’s official “mandate” is to balance price stability and maximum employment.
Generally, when unemployment is high and the economy is weak, the Fed lowers its benchmark rate, allowing banks to ease financial pressure on consumers and making it less expensive to purchase big-ticket items through financing and credit. When inflation is high, and the economy is in overdrive, the Fed tends to hike its benchmark interest rate to discourage borrowing and decrease the money supply.
However, the Fed takes a risk if it is too restrictive, i.e., if it slows down the economy too much with steep rates. Any rapid decline in economic activity can cause a spike in joblessness, leading to a recession. Central bankers also take a risk if they ease rates too quickly. You might hear the phrase “soft landing,” which refers to the Fed’s balancing act of keeping prices in check and unemployment low.
“The Fed wants to cut rates, but if they move too fast and inflation flares back up, they risk losing control,” said Rueth. “So they’ll tread carefully, even if the public is feeling the squeeze.”
The economy shouldn’t be too hot or too cold. According to those running the market, it’s supposed to be just right, like the porridge in Goldilocks.
Though most US households are strained in the real world, official government statistics aren’t yet reflecting a crisis. For now, the Fed is buying some breathing room to assess the impact of layoffs, tariffs, federal cuts and geopolitical tensions. But, with growing anxiety from Wall Street and Main Street, central bankers will be under pressure from all sides to make a move soon.
Read more: What This Week’s Fed Decision Means for Mortgage Rates
What today’s Fed decision means for your money
Over the last few years, high interest rates have made credit and loans more expensive. Although last year’s interest rate cuts didn’t improve the financial situation for most low-income and middle-income households, the government’s monetary policy always impacts your money in some way over the long term.
Here’s what today’s decision to pause rate cuts means for credit card APRs, mortgage rates and savings rates.
🏦 Credit card APRs
Holding the federal funds rate steady could cause credit card issuers to charge the same annual percentage rate on your outstanding balance each month. However, every issuer has different rules about changing APRs.
“Some credit card APRs have inched down slightly after the Fed’s rate cuts last year, but they’re still really high. Even if you can’t pay off the full balance, try to make more than the minimum payment each month to avoid additional interest. If you qualify for a balance transfer card or personal loan with a lower interest rate, either could potentially help you pay off your debt faster.” — Tiffany Connors, CNET Money editor
🏦 Mortgage rates
The Fed’s decisions impact overall borrowing costs and financial conditions, which in turn influence the housing market and home loan rates, although it’s not a one-to-one relationship.
“Even as the Fed holds interest rates steady, mortgage rates will continue to fluctuate in response to new economic data and political announcements. For the Fed to resume cutting interest rates and for mortgage rates to drop, further progress on inflation is needed. Even then, mortgage rates tend to rise quickly and fall slowly. It could take until the end of the year for rates to get into the low-6% range.” — Katherine Watt, CNET Money housing reporter
🏦 Savings rates
Savings rates are variable and move in lockstep with the federal funds rate, so your annual percentage yield may go down following more rate cuts later this year. Just remember that not all banks are created equal, and we regularly track the best high-yield savings accounts and certificates of deposits at CNET.
“A rate pause means we’re not likely to see any significant change in CD and savings account APYs, at least for the time being. That gives savers more time to maximize their earnings by locking in a high CD rate or taking advantage of high savings rates while they’re still around. However, banks can change their rates at any time, and we’ve seen some drop their APYs in recent weeks.” — Kelly Ernst, CNET Money editor
What’s next for interest rate cuts
Experts still anticipate the potential for two rate cuts in 2025, though market watchers and economists usually have varying opinions about the Fed’s monetary decisions. The pace of interest rate reductions will depend on the job market, inflation pressures and other political and financial developments.