The Federal Reserve is widely expected to leave interest rates unchanged at the conclusion of its two-day policy meeting Wednesday. So what does that mean for Americans who aren’t glued to CNBC and a Bloomberg terminal?
It means stability. Interest rates are frozen just shy of 2.5 percent, and the Fed’s top official has said he doesn’t have any plans to change that rate anytime soon, meaning savers and borrowers have a pretty good idea what rates they will face for much of 2019.
It also means President Trump isn’t getting what he wants. He made it clear in a tweet this week that he wants interest rates to be 1.5 percent, a full percentage point lower, to stimulate the economy (even though it’s doing well). Federal Reserve Chair Jerome H. Powell (a Trump appointee) almost certainly isn’t going to do that right now, and he’s highly unlikely to do it in the next year unless the economy shows big problems.
A nearly 2.5 percent interest rate might feel high because it’s the highest rate the United States has seen in more than a decade. But it’s a low rate by historical standards (remember 10 percent-plus rates in the 1980s and 5 percent-plus rates in the late 1990s?).
Fed leaders argue that it’s a Goldilocks number: It doesn’t stimulate the economy, and it doesn’t hold it back. They call it a “neutral” rate.
On a practical level, here’s what it means for the economy.
Savers aren’t happy: Anyone with money in a savings account knows banks are still paying anemic interest. Many of the big banks are giving 0.1 percent. Savers have to hunt around for better offers like MySavingsDirect, which is offering 2.4 percent. Most banks are unlikely to offer much above 2 percent, because banks want to make a profit, and they can do that by paying savers less than the bank earns on interest from the Fed.
Investors are happy: Wall Street has cheered the Fed’s “pause.” U.S. stocks are back at record highs and have climbed at almost a straight line up ever since Powell said in early January that the Fed would be “patient” on rate hikes in 2019. Fairly low interest rates make it easier for companies to borrow money and repay their debts.
Borrowers are happy: Interest rates around 2.5 percent makes it fairly cheap to borrow money and repay loans. There has been concern about the massive amount of corporate debt that companies have taken on and what would happen as interest rates rose. The Fed’s pause gives companies more time to sort that out. It’s a similar story for individuals who have a lot of debt — they get a respite knowing rates won’t go much higher.
Mortgage rates (roughly) on hold: The Fed doesn’t directly control mortgage rates, but typically when the Fed raises interest rates, mortgages rates rise and vice versa. At the moment most 30-year mortgage rates are in the 4 to 4.25 percent range. The rates are likely to move around some but aren’t expected to jump much more this year if the Fed continues to pause. This should boost the housing market after a rough few months for housing, which some blamed on the Fed’s rate hikes last year.
Credit card rates (mostly) on hold: Many credit cards have “variable” interest rates that typically go up when the Fed raises rates and down when the Fed lowers rates. Credit card rates jumped last year after the Fed hiked interest rates a full percentage point, causing some borrowers to struggle to make their payments. But the Fed’s pause is likely to keep credit card rates fairly steady this year, giving borrowers some relief.
Student loans and auto loans: Many of these loans are taken out a “fixed” rates of interest that do not change over time, regardless of what the Fed does or what happens to the economy. So nothing much changes here.
Concerns about “tools for next downturn”: One of the only major concerns about the Fed pausing interest rates at just shy of 2.5 percent is that it leaves little ammunition for the central bank to fight the next downturn. When the economy hits a rough patch, the Fed typically cuts interest rates by 3 or 4 percentage points. With interest rates at 2.5 percent, it means any emergency cuts would be on a smaller scale than in the past. All of this is a hypothetical discussion at the moment, as the economy is showing many signs of health, but central bankers are paid to worry, and this is on their minds.