Borrowing costs remain unchanged for now. The Federal Reserve recently held its benchmark interest rate steady at its target range of 4.25% to 4.5%, a decision that aligns with market expectations following the central bank’s earlier meetings.
This means consumers won’t see immediate relief on interest rates for short-term loans heavily influenced by the Fed, such as credit cards and auto loans. These rates remain significantly higher than they were in early 2022 before the Fed began raising rates to curb inflation.
Why the Fed Didn’t Cut Rates (Yet)
Despite some signs of moderating inflation and political pressure for lower rates, the Fed opted for a “wait-and-see” approach. A major factor driving this caution is the uncertainty surrounding the impact of recently heightened tariffs on imported goods.
While recent inflation reports have been relatively tame, including a slight tick up to 2.4% in May, Fed officials worry that the full inflationary effect of tariffs might be delayed. Businesses that initially absorbed higher costs or drew down inventories may soon pass those costs onto consumers. Analysts suggest that retail prices could rise noticeably if even a portion of tariff costs are transferred, a concern echoed by major retailers. Cutting rates now, before this tariff impact is clear, could inadvertently fuel inflation by encouraging more borrowing for goods that are already becoming more expensive.
Adding to the complexity are mixed signals from the U.S. economy. While the recent May jobs report showed unemployment steady at 4.2% and added 139,000 jobs, other indicators suggest potential cracks. There are signs of weakening consumer demand and a cooler labor market, such as rising unemployment claims and slower hiring rates, suggesting consumers might be less able to absorb higher prices.
Federal Reserve Chair Jerome Powell highlighted the tariff uncertainty as a key reason for holding rates, stating it’s “too early to know” their full implications for the economy, growth, and employment. The Fed aims to balance keeping inflation around 2% with maintaining maximum employment.
When Might Interest Rates Fall?
Based on market forecasts, the earliest most analysts predict a rate cut is at the Fed’s meeting on September 17th. The CME FedWatch tool, which tracks market probabilities based on futures prices, indicated around a 56-58% chance of a rate cut occurring by September following the Fed’s latest announcement.
The Fed’s own economic projections released alongside their decision show that the majority of the policy-making committee still anticipate making two interest rate cuts before the end of 2025.
While September is currently seen as the most likely starting point, some economists predict the first cut could come later, potentially in December, while others hold onto hopes for an earlier move, perhaps July. Regardless of the exact timing, the consensus among most experts is that significant rate reductions are not expected immediately but are likely to begin sometime later in 2025.
How Fed Decisions Impact Your Wallet
Credit Cards & Auto Loans: Rates on these short-term loans closely follow the prime rate, which moves in lockstep with the federal funds rate. Since the Fed held rates steady, expect no immediate drop in borrowing costs for these products. Current rates remain significantly higher than they were just a few years ago. In the current uncertain environment, banks may even be hesitant to lower rates or could adjust them upwards to manage risk.
Mortgage Rates: These are primarily influenced by long-term rates, driven by expectations about inflation and the overall economy rather than directly by the fed funds rate. While anticipation of Fed cuts can sometimes lead to lower mortgage rates, they have seen complex movements recently. According to recent data, the average rate on a 30-year fixed mortgage was around 6.8%, more than double the roughly 3.1% rates seen in December 2021. This difference has a massive impact on housing affordability; on a $425,000 home with 20% down, a 6.8% rate costs about $763 more per month in principal and interest than a 3.1% rate did.
Savings Accounts & CDs: High-yield savings account rates tend to track actual changes in the federal funds rate, so they are unlikely to decrease immediately. However, Certificate of Deposit (CD) rates often adjust in anticipation* of future Fed moves. With market expectations pointing to eventual rate cuts, some banks might preemptively lower CD rates soon. For savers, this means now is a good time to explore locking in today’s competitive CD rates (many still offer 4-5% APY for various terms) or moving funds to high-yield savings accounts before potential future declines.
In conclusion, while the door remains open for future rate cuts, the Federal Reserve is prioritizing patience amidst economic uncertainty, particularly regarding the effects of tariffs. Borrowers will likely need to wait until later in 2025 for relief, while savers might consider acting now to secure today’s relatively high rates.
