Even if the Fed holds rates steady in September, policy will stay restrictive, says Morgan Stanley

The Federal Reserve left its target federal funds rate unchanged Wednesday, but did not signal an end to its aggressive rate hike campaign.

For households, that offers little relief from sky-high borrowing costs.

Altogether, Fed officials have raised rates 11 times in a year and a half, pushing the key interest rate to a target range of 5.25% to 5.5%, the highest level in more than 22 years. 

“I’m worried for the consumer,” said Tomas Philipson, University of Chicago economist and a former chair of the White House Council of Economic Advisers. “People are hit on both fronts — lower real wages and higher rates.”

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Since wage growth for many Americans hasn’t been able to keep pace with higher prices, those households are getting squeezed and are going into debt just when borrowing rates are spiking, Philipson said.

Real average hourly earnings fell 0.5% in August, while borrowers are paying more on credit cards, student loans and other types of debt.

“Borrowing is very expensive, period,” Philipson said.

What the federal funds rate means for you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

Here’s a breakdown of how the central bank’s increases so far have affected consumers:

Credit cards

Home loans

Auto loans

Student loans

Savings accounts

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.43%, on average, according to the Federal Deposit Insurance Corp.

Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are now paying over 5%, according to Bankrate, which is the most savers have been able to earn in more than 15 years.

Because the top online savings accounts are currently beating inflation, “money in a savings account is no longer a drag on your portfolio,” McBride said. And yet, only 22% of savers are earning 3% or more on their accounts, according to another Bankrate report.

“Boosting emergency savings is rewarded with returns exceeding 5%, if you’re putting the money in the right place,” McBride said.

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Post source: cnbc

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