Fed leaves interest rates unchanged. How it could affect your wallet

The Federal Reserve kept interest rates unchanged Wednesday, but the central bank’s latest policy decision could still have significant implications for household budgets.

Higher energy prices stemming from the Iran conflict may have lasting inflationary effects, which likely contributed to the Fed’s decision to leave rates on hold as policymakers wait to gauge the economic fallout, economists said. The dynamic could also lead policymakers to consider raising rates at their September meeting, even as President Donald Trump has said that the U.S. “should have the lowest interest rate in the world.”

“It’s very difficult to read the chairman and know his view of the path forward,” said Eugenio Alemán, chief economist at Raymond James, referring to new Fed Chairman Kevin Warsh.

However, any move toward higher rates would increase borrowing costs for consumers at a time when affordability pressures are already mounting. “Consumers will remain stressed going forward, and if they start increasing interest rates, conditions are going to deteriorate further,” Alemán said.

Generally, shorter-term rates on consumer debt are closely pegged to the prime rate, which is typically 3 percentage points above the fed funds rate. Longer-term rates are more dependent on inflation expectations and other economic factors.

For example, most credit cards have a variable rate, so there’s a direct connection to the Fed’s overnight rate.

With the Fed’s benchmark holding steady, the average interest rate on a new credit card offer has hovered near 24% for months, according to LendingTree.

“Anyone expecting the Fed to ride to the rescue and lower rates is almost certainly going to be disappointed,” said Matt Schulz, LendingTree’s chief consumer finance analyst. 

Auto loan rates are fixed for the life of the loan but have also remained elevated, in part because of the Fed’s benchmark, experts said. The average rate on a six-year loan for a new car is currently 7%, while the average auto loan rate for a used car is 10.5%, according to Edmunds.

“With another rate hold … relief isn’t on the horizon,” said Jessica Caldwell, head of insights at Edmunds.

But the real impact can be seen in the shrinking pool of buyers who can afford new vehicles, Caldwell said.

“Sustained high rates keep automakers from rolling out broad, zero-percent financing deals,” she said. “That high-rate floor is increasingly pricing middle- and lower-income buyers out of the new-car market, shifting sales toward higher earners who can absorb the cost.”

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