Interest Rates Surge Despite Fed’S Inaction
On May 2, the Federal Reserve announced that it would keep its interest rate target unchanged for the time being, after raising rates in its prior meeting. The decision to stand pat for now was not unexpected given the Fed's cautious approach to rate changes, but consumers need to be alert to more dynamic changes affecting interest rates.
Federal funds rate target -- for now
The Fed remains committed to gradually restoring interest rates to more normal levels, after having pushed them to extreme lows in an attempt to aid recovery from the Great Recession. The Fed's current rate target is a range of 1 1/2 to 1 3/4 percent.
By way of perspective, over the past 30 years the federal funds rate has averaged 3.27 percent, and reached a low of 0.07 percent on a few occasions in the years following the Great Recession.
While the Fed has a stated goal of steadily raising interest rates as long as economic conditions permit, it has also stated that it expects rates to remain below long-term normal levels for the foreseeable future.
Inflation concerns ease
The Fed's caution stems from trying to maintain a balance between encouraging economic growth and managing inflation. Raising rates too slowly could allow inflation to gain traction, while doing so too quickly could snuff out growth. Therefore, the Fed typically takes an incremental approach to raising rates so the economy can have a chance to adapt between rate increases.
Significantly, the Fed got a bit of a break when inflation took a step back recently. The Bureau of Labor Statistics announced that the Consumer Price Index declined by 0.1 percent in March, after having run at a pace above the Fed's 2 percent inflation target for several months prior. A calming of inflation takes some pressure off the Fed to raise interest rates more quickly.
Interest rates move independently
While the Fed took no action to raise interest rates in its most recent meeting, consumers should be aware that the Fed does not directly control the market interest rates that affect them -- mortgage rates or savings account rates and money market account rates.
Specifically, because bank rates continue to rise organically, consumers should take note of the following:
- Mortgage rates rising
The 30-year mortgage rate has jumped by 59 basis points so far this year, to 4.58 percent according to Freddie Mac. That puts them at their highest level in nearly seven years. People looking to buy a house may want to act before the mortgage rates move even higher.
- Some savings account rates surge above the average
While average bank rates on deposit accounts have barely budged, MoneyRates.com has found several savings account rates and money market rates are moving much more quickly. So, while average rates remain near zero, smart shoppers can earn well above 1 percent on their savings and money market accounts.
The Fed's rate decisions are significant, but they are not the only factors affecting rates. Market rates are rising more quickly than they have in years, and consumers should adjust their decisions accordingly.