Estimated read time: 6-7 minutes
SALT LAKE CITY — The Federal Reserve concluded its June meeting on Wednesday without making any changes to its federal funds interest rate and updated earlier messaging about multiple potential rate cuts happening this year, signaling a single cut is now the more likely scenario.
The Fed's Open Market Committee voted to keep rates at the current range of 5.25% to 5.5%, where they've stood since July of last year after a series of 11 straight increases were levied by the monetary body, a strategy aiming to cool off a too-hot U.S. economy.
At a press conference Wednesday afternoon, Fed Chairman Jerome Powell said Fed officials did take into account the latest federal inflation data released by the U.S. Department of Labor on Wednesday morning before the rate policy vote was cast. The new Consumer Price Index finds overall inflation edged down slightly from April to May and finished the month at a 3.3% annual rate. The Core Consumer Price Index, which strips out volatile food and energy costs, ran at an annual rate of 3.4% in May.
While Powell noted that the U.S. labor market is continuing to move into a better supply-and-demand balance, and inflation is edging down again, the Fed needs to see more evidence of sustainable movement toward the body's goal of 2% inflation before making any downward adjustment to its overnight lending rate.
"So far this year, we have not been given that greater confidence," Powell said. "We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%."
An eye on jobs sector
Powell said he and his Fed colleagues are monitoring a wide-ranging set of data points but also keeping a watchful eye on the U.S. jobs market, which remains robust but has slowed considerably from its breakneck pace of the last two years. Powell said the goal of policymakers is to anticipate coming changes rather than "wait for things to break then fix them." The latest federal labor market data, released last week, found U.S. businesses added 272,000 new positions in May even as unemployment inched up to 4%.
"The labor market sometimes has a tendency to weaken quickly," Powell said. "We're not waiting for that to happen."
Powell said the current read on the jobs front is for continued gradual cooling but noted the monetary body was ready to respond should any unexpected changes arise.
The Fed committee now projects five interest rate cuts by the end of 2025, with a likely 0.25% reduction this year and four additional reductions next year, ending 2025 with the body's benchmark rate at 4.1%. Fed officials project a 2.8% inflation rate by the end of the year.
But what does it all mean for the average consumer?
Here's how the Fed interest rate impacts you
Where the Federal Reserve sets its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution's total deposits — trickles down to consumers in numerous ways.
First, mortgage rates don't necessarily move up in tandem with the Fed's rate increases. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors' expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic, and were hovering around 2% in late 2021, the rates tracked up alongside the Fed's series of 11 hikes to its federal funds rate.
As of Thursday, the average rate on a 30-year fixed rate mortgage was 6.95%, according to tracking by Freddie Mac. Last October, that rate reached nearly 7.8%, the highest since the late 1990s, but still not excessive from a historical perspective. Home mortgage rates breached the 18% mark in the early 1980s, for example.
Higher rates can also make accessing credit, like qualifying for a home mortgage or new car loan, more difficult as banks tighten lending policy to reflect economic conditions. A poll conducted in March by Bankrate found half of U.S. applicants have been denied a loan or financial product since the Fed began raising interest rates two years ago. Americans with credit scores below 670 are finding it toughest to access credit.
Credit card rates are set by issuing institutions based on a number of factors, including the card applicant's personal credit history, but base rates are computed in part using the prime lending rate which is tied to the Fed's benchmark rates. According to the Consumer Financial Protection Bureau, over the last 10 years, average annual percentage rates on credit cards assessed interest have almost doubled from 12.9% in late 2013 to 22.8% in 2023 — the highest level recorded since the Federal Reserve began collecting that data in 1994.
One silver lining for consumers in the midst of a high interest rate period is better returns on savings. Top-yielding savings accounts are currently paying more than 5%, according to CNBC, a rate that is outpacing inflation.
"Savers are sitting back and enjoying the best environment they've seen in more than 15 years," Greg McBride, chief financial analyst at Bankrate.com, told CNBC.
What's happening with inflation?
Wednesday's Consumer Price Index report finds overall annual inflation eased slightly from April's 3.4% rate but some categories continue to track up at a much faster pace, including housing-related costs which rose 0.4% month-over-month in May and are up 5.4% from a year ago. Prices on food purchased away from home also moved up 0.4% last month and are 4% higher than this time last year. Grocery prices held steady on a monthly basis in May and were 1% more expensive than 12 months ago.
Helping to offset inflationary pressures in some areas of consumer spending were easing costs for gasoline, which dropped 3.6% from April to May and were 2.2% higher than this time last year and a 2% decline in overall energy prices on a monthly basis.
The May measures for both overall inflation and core inflation came in lower than most economists were expecting.
Wednesday's Consumer Price Index reading follows the latest Personal Consumption Expenditure report from the U.S. Department of Commerce, released late last month, that found inflation still inched up from March to April but was the smallest monthly increase so far this year and annual inflation held steady.
The core expenditure index is the Fed's preferred metric when it comes to how the monetary body assesses inflationary impacts.
Interest rate adjustments are the Fed's primary weapon in an ongoing battle against the elevated prices of consumer goods and services. While the monetary body has paused making any rate adjustments since its July 2023 meeting, it had imposed 11 increases going back to March 2022, the most aggressive series of rate hikes in decades.
The rate increases raise the cost of debt for businesses and consumers, a move that aims to reduce the amount of spending and overall economic activity. That shift in dynamics typically leads to lower inflation rates.
