Key takeaways: The Federal Open Market Committee (FOMC) is expected to keep interest rates unchanged after its October 28 meeting, though another rate hike before year-end remains possible. For most Americans, higher borrowing costs will continue to weigh on household budgets amid growing affordability pressures. The following explains how the central bank's next policy moves could affect your personal finances.
Despite rising energy costs complicating the inflation outlook and further straining household budgets, the Federal Reserve is still expected to hold rates steady at its upcoming October meeting. September CPI, the core broad gauge of inflation, rose again, pushing the annual U.S. inflation rate to 3.7%. Driven by an oil price surge linked to the U.S.-Iran conflict, the September Producer Price Index (PPI) also climbed. On Friday, Brent crude spiked during intraday trading before pulling back slightly.
The Fed raised rates by 25 basis points last month, lifting the federal funds rate range to 3.75%-4%. But the CME Group's FedWatch tool shows federal funds futures now price in less than a 10% probability of another 25 basis point hike at this week's meeting; nearly 75% of market participants expect at least one more hike before year-end. "Inflation remains the number one problem for the U.S. economy, and many signs suggest it is broadening," said Heather Long, chief economist at Navy Federal Credit Union. "For consumers, that means borrowing costs will stay elevated for the foreseeable future." She added, however: "With the election just around the corner, the Fed won't choose to hike in October."
The Fed's meeting comes just days before the midterm elections, and its latest policy signal on U.S. inflation before voters head to the polls could influence the balance of power among parties in Washington. Research shows that in past election cycles, the Fed has mostly stuck to its established policy path. Mark Shore, an economist and director at CME Group, noted that historically the Fed has raised rates four times near midterm elections, in 1978, 1982, 2018 and 2022, each driven by rising inflation. Fed Chair Kevin Warsh has stated his commitment to bringing inflation down to the Fed's 2% target. "If the Fed chooses to hold rates steady, the market may question the Fed's credibility in fighting inflation," Bank of America economist Aditya Bhave wrote in an October 23 research note.
How the Fed affects your personal finances. The Fed's benchmark rate sets the rate at which banks lend to one another overnight, which in turn influences a wide range of consumer borrowing and savings rates. While rate hikes help ease inflation pressures, in the short term they raise borrowing costs and add to the financial strain already weighing on many households. Short-term rates are closely tied to the prime rate, which typically runs about 3 percentage points above the federal funds rate. Long-term borrowing costs, by contrast, are driven more by inflation expectations and the overall economic outlook. "Rising long-term rates hurt the average consumer's wallet more, and their increase has already outpaced short-term rates, severely suppressing refinancing, home purchases and auto sales. Higher short-term rates also hit hard, mainly pushing up interest on credit cards, consumer finance loans and home equity lines of credit," said Mark Zandi, chief economist at Moody's.
The vast majority of credit cards carry variable rates that track the Fed's benchmark rate closely. So if the Fed holds rates steady, actual credit card annual percentage rates (APRs) will likely remain at their current elevated levels. Data from LendingTree shows the average APR on newly issued credit cards currently stands at 23.96%. Mortgage rates, by contrast, are driven more by Treasury yields and the economic outlook. As the benchmark for many long-term loans, the 10-year Treasury yield recently approached 5%, which according to Mortgage Daily News has kept the average 30-year fixed mortgage rate near 7.4%. Auto loan rates are influenced by multiple factors, with the Fed's benchmark rate being one of them. According to Edmunds, with financing costs staying high, many car buyers are taking out larger loans and extending repayment periods to cope with reduced purchasing power. Federal student loan rates are fixed for the life of the loan, but due to the results of the May 10-year Treasury auction, rates on new student loans applied for this academic year have already risen.
Yields on most savings products track the federal funds rate, which is one of the few bright spots in a prolonged period of high rates. Because the Fed is keeping rates high, savers can still earn relatively attractive returns from high-yield savings accounts and other deposit products.
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