Fed leaves key interest rate alone. What does that mean to consumers?
California consumers will have to wait longer to see interest rates come down. And when they do, they probably won’t be coming down very much.
There was hope last year that the Federal Reserve would start lowering its key rate at it meeting Wednesday. That didn’t happen.
Mark Schniepp, director of the Santa Barbara-based California Economic Forecast, predicted the Fed will cut rates in the next few months, though any change is unlikely to be significant enough to make much difference in what consumers are paying for homes, cars and credit.
Mortgage interest rates should be “coming down in the second half as inflation creeps down slowly,” said Jordan Levine, senior vice president and chief economist for the California Association of Realtors.
Mortgage rates have shown little significant movement in recent months.
The average rate for a 30-year fixed rate mortgage last week was 6.74%, Freddie Mac found, roughly the same as the 6.88% recorded a year ago.
“Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation,” said an analysis by Freddie Mac, which tracks the rates. “In this environment, there is a good possibility that rates will stay higher for a longer period of time,” it said.
The state Realtors association estimated that in the last quarter of 2023, a home buyer needed a minimum annual income of $222,800 to qualify to buy an existing single family home at the state $833,170 median price. It estimated that about 15% of California households could afford that level of spending.
The monthly payment on that house, including taxes and insurance, with a 30-year, fixed-rate loan, would be $5,570, assuming a 20% down payment and an effective composite interest rate of 7.39%.
Interest rates and inflation
The key to whether any rates fall is pegged to the rate of inflation. The Fed wants prices to rise an average of 2% on an annual basis. The most recent data, for the 12 months ending in February, showed a 3.2% increase.
Interest rates are regarded as an important tool for controlling prices, since higher interest costs are supposed to reduce demand, thus spurring sellers to keep prices stable.
While inflation has retreated from its 9.1% peak in June 2022, its steepest annual increase in nearly 41 years, the slowdown in inflation has since not met the Fed target.
The Fed said in a statement Wednesday it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Ken Tumin, founder and editor of DepositAccounts.com, which also tracks rates, predicted any cut is unlikely before the Fed’s June meeting.
“If the current inflation trend continues into March and April, the Fed may decide to push out the first rate cut into the second half of 2024,” Tumin said.
Indications are that even a Fed rate change “will not be significant enough to make much difference directly,” said Schniepp.
He did offer this hope about Fed action: “The message it sends to the stock market can be much larger and cause the bond market to start rallying because it confirms to the market” that the Fed looks to cut rates.
And, Schiepp said, “a rallying bond market means longer term interest rate reductions which have more meaning for car loans and mortgages.”
At the moment, though, consumers face weeks and probably months of status quo interest rates–and slightly lower savings rates.
“With the high likelihood that peak rates have been reached and that Fed rate cuts will come at some point in 2024, banks have been proactive in cutting their CD rates,” Tumin said.
He found several online banks have cut their certificate of deposit rates “multiple times” this year.
