How will the Fed’s decision to keep rates the same affect your money?

Policymakers at the US central bank wrapped up their March meeting on Wednesday and as expected the Federal Reserve left rates unchanged. The federal fund rate has been at 5.25-5.5% since July last year when it was raised to the current 23-year high.

The decision came after inflation creeped up in February to 3.2 percent compared to 3.1 percent the month before. While that is well below the peak of 9.1 percent in June 2022, it is still above the target rate of 2 percent. Increases in energy and shelter played a majority role in pushing up inflation in February according to the US Bureau of Labor Statistics.

Chairman Jerome Powell said at the press conference following the decision that the Fed has consistently warned that it was going to be a “bumpy ride” to get down to two percent inflation. “Now here are some bumps and the question is; are they more than bumps?” he explained. “We just don’t, we can’t know that. That’s why we are approaching this question carefully.”

Experts don’t expect the Fed to start cutting rates until at least June. Policymakers have penciled in three cuts of a quarter point before the end of the year. However, rates are not predicted to be back to normal until the end of next year.

How will the Fed’s decision to keep rates the same affect your money?

High interest rates affect individuals differently depending on whether they are borrowing or saving. Those in the former group will have a harder time paying down their debt while the latter, after years of extremely low interest rates, are finally seeing their money work for them.

Americans during the pandemic in general saw the amount they were saving spike. However, high inflation in the wake of the pandemic due to the disruptions it caused have seen their savings shrink and credit card debt skyrocket.

According to the latest data from the Federal Reserve Bank of New York, Americans have $1.13 trillion in credit card debt. Those running a balance are paying ever more, with the average APR on a new credit card currently 24.66% in March according to LendingTree.

On the other hand, a GOBankingRates survey of US adults conducted in November 2023 found that nearly half have $500 or less in their savings accounts and 60 reported having $500 or less in their checking accounts. However, those who have an emergency fund or able to squirrel away some extra funds can put them to work, taking advantage of high-interest savings accounts and short-term CDs.

CBS business analyst Jill Schlesinger speaking on Money Watch recommends that Americans keep enough in their bank accounts to avoid fees and keep their freebies but that they get their money to work for them.

With tax season under way, millions of Americans will be expecting a tax refund. Her advice, if you are going to need that money, is to “pay down debt, put some money in savings,” to lock in the high interest rates now, because they will come down.