After ten straight increases, the Federal Reserve announced during its June 13-14 meeting that interest rates would not increase, at least temporarily. With the Federal Reserve’s decision to hold interest rates as is, interest rates remain between 5.0 and 5.25 percent, allowing the Fed to assess whether interest rates have risen high enough to tame inflation for good or if more increases will be necessary.

“Holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the rate-setting Federal Open Market Committee said in a unanimous policy statement issued at the end of its June 2023 two-day meeting.

The Federal Reserve’s decision to keep interest rates steady comes after the Bureau of Labor Statistics released a Consumer Report Index report on June 13, reflecting that inflation had dropped to 4 percent in May 2023, the smallest annual increase since March 2021. For comparison, inflation was around 9 percent in May 2022.

Food prices ticked up 0.2 percent in May compared to April, with grocery costs essentially flat after falling in the previous two months, the Consumer Report Index found. Energy prices dropped a whopping 3.6 percent — with gasoline alone plunging 5.6 percent. While the Consumer Price Index tracks everything from cars to telephone plans, food and fuel prices stand out the most for consumers.

While inflation is moving in the right direction, it’s still higher than the Fed’s 2 percent target rate nationwide. However, there is some good news. Minneapolis and Honolulu became the first major U.S. cities to see inflation fall back in line with the Federal Reserve’s national target of 2 percent since the pandemic price surge began in 2021.

“We understand the hardship that high inflation is causing, and we remain strongly committed to bring inflation back down to our 2 percent goal,” Fed Chair Jerome Powell said. “The process of getting inflation down is going to be a gradual one — it’s going to take some time.”

With the Fed expecting at least two additional interest rate hikes in 2023, the chances that the Fed will vote to cut interest rates by the end of the year is becoming less likely. With the economy performing better than expected, the Fed says inflation is not cooling as fast as expected.

“We want to see inflation coming down decisively,” Powell said. “As we get closer and closer to our destination (the peak rate), it’s reasonable, it’s common sense to go a little slower.”

While the Federal Reserve may not have chosen to raise interest rates this time, the governing board hinted that interest rate increases are likely later this year. Specifically, the Fed hinted at raising interest rates at least two more times in 2023, with the next increase coming as soon as July 2023. The Fed also hinted that interest rate cuts are not likely until 2024.

“The Federal Reserve is getting close to the end of interest rate hikes,” says Greg McBride, CFA, Bankrate chief financial analyst. “After the fastest pace of rate increases in 40 years, rates are high enough to have a slowing effect on the economy. There isn’t the same urgency to keep raising them at this point, but with core inflation stubbornly high it is too early for the Fed to fold up the tent and go home.”

“Things are still moving in the right direction and encouraging,” says Kathy Bostjancic, chief economist at Nationwide. “But when we look at what we call the ‘core’ consumer price index, there is where you still see some stickiness.”

“The Fed is far from calling victory on the inflation front,” she says. “If need be, they’ll raise rates again as soon as July.”

Vanguard senior economist Asawari Sathe agrees that “inflation will continue to be moderate” for the remainder of 2023 and believes that the Fed cutting interest rates in 2023 is unlikely, noting that Vanguard’s model expects the Fed “won’t be in a position to cut interest rates until the middle of 2024.”

Inflation, Interest Rates Impacting Consumers’ Ability to Save, Pay Off Debt

Inflation is no longer the only thing eating away at consumers’ budgets. Borrowing costs, thanks to the Fed’s interest rate increases, are rising at the fastest pace in decades. For example, the average interest rate on credit cards is now more than 20 percent. For those who have a balance on their credit cards, the higher interest rates have meant balances are ballooning as consumers struggle to keep up with rising prices, and it’s getting harder to save money.

“For millions of Americans, the paycheck just doesn’t go as far as the household expenses are now going, due to inflation,” McBride told NPR. “Budgets are stretched. And we’ve seen that with savings coming down and with credit card debt going up.”

On a positive note, those who are able to set aside money for their savings accounts are finding the interest rate earnings on their money quite rewarding.

“Savers are seeing the best returns that they’ve seen in 15 years, provided that they’re looking in the right place,” McBride says.

While inflation is still higher than the Fed’s target of 2 percent nationwide, some U.S. cities are seeing inflation decrease at a faster pace. Minneapolis, for example, saw prices increase 1.8 percent in the last 12 months through May, while Honolulu saw a 2 percent increase, according to the Bureau of Labor Statistics. 

The decrease in inflation in both Minneapolis and Honolulu was largely credited to big drop-offs in the cost of household energy and motor fuel.

Inflation may be decreasing in some major U.S. cities, but it’s rising in others.

WalletHub recently compared 23 major Metropolitan Statistical Areas to find how inflation has changed in the last year. Here’s what they found:

1. Miami – Fort Lauderdale – West Palm Beach, Florida: 9.0 percent
2. Phoenix – Mesa – Scottsdale, Arizona: 7.40 percent
3. Tampa – St. Petersburg – Clearwater, Florida: 7.30 percent
4. Seattle – Tacoma – Bellevue, Washington: 6.90 percent
5. Detroit – Warren – Dearborn, Michigan: 6.60 percent
6. Atlanta – Sandy Springs – Roswell, Georgia: 5.80 percent
7. Baltimore – Columbia – Towson, Maryland: 5.30 percent
8. San Diego – Carlsbad, California: 5.20 percent
9. Denver – Aurora – Lakewood, Colorado: 5.10 percent
10. Dallas – Fort Worth – Arlington, Texas: 4.70 percent
11. Philadelphia – Camden – Wilmington, Pennsylvania, New Jersey, Delaware, Maryland – 4.70 percent
12. St. Louis, Missouri: 4.20 percent
13. San Francisco – Oakland – Hayward, California: 4.20 percent
14. Houston – The Woodlands – Sugar Land, Texas: 4.0 percent
15. Riverside – San Bernardino – Ontario, California: 3.90 percent
16. Boston – Cambridge – Newton, Massachusetts, New Hampshire: 3.60 percent
17. New York – Newark – Jersey City, New York, New Jersey, Pennsylvania: 3.50 percent
18. Chicago – Naperville – Elgin: Illinois, Indiana, Wisconsin: 3.30 percent
19. Los Angeles – Long Beach – Anaheim, California: 3.20 percent
20. Washington, DC – Arlington – Alexandria, Virginia, Maryland, West Viriginia: 3.10 percent
21. Anchorage, Alaska: 3.10 percent
22. Urban Honolulu, Hawaii: 2.0 percent
23. Minneapolis – St. Paul, Bloomington, Minnesota, Wisconsin: 1.80 percent

How Does the Fed’s Decision Affect Your Money?

1. Savings Accounts & CDs

The Fed’s decision to keep interest rates flat means that many banks are likely to pause (or at least slow) raising returns on their savings and money market accounts. If you are looking to maximize interest earnings on a savings account, shop around and compare rates from online banks and credit unions in addition to traditional banks. 

For those with CDs, you typically lock in rates when you open your account and will retain those yields for the term of the CD unless you pay a penalty to break it. But with interest rates likely peaking, it may be a good opportunity to lock in longer maturities on CDs, especially those in the 2-year to 5-year timeframe while they remain relatively high, Bankrate recommends.

“With the Fed on the sidelines, there isn’t the catalyst to push savings account and CD yields higher,” says McBride. “The big win for savers in the months ahead won’t come from interest rates continuing to climb, it will come from inflation continuing to fall.”

2. Mortgages

“With core inflation stubbornly high, we’re unlikely to see material improvement in mortgage rates even if the Fed doesn’t raise interest rates further,” says McBride. “The phrase ‘higher rates for longer’ most certainly applies to mortgage rates.”

What does this mean for potential homebuyers? Mortgage rates remain well above where they were a year ago, and this, along with the rapid rise in housing prices, continues to create a double whammy for potential homebuyers. Because home prices are more expensive and borrowing costs associated with buying a home is expensive, there is the potential for a slowdown in the housing market.

If you are a homeowner looking at borrowing money against the value of your home with a home equity line of credit, or if you already have a HELOC, interest rates should remain flat since HELOCs stay aligned with changes in the federal funds rate, Bankrate notes. Those with outstanding balances on their HELOC will see rates remain steady. If you’re looking to take out a HELOC, now may be a good time to comparison-shop for the best rate.

3. Credit Cards

Interest on variable-rate cards will remain more or less steady for now with the Fed’s decision to keep interest rates as is. But rates on credit cards are already at multi-decade highs and are contributing to consumers’ struggle to not only pay off debt but to save money for a rainy day.

If you have credit card debt, consider working with a credit counseling organization like DebtWave to lower your interest rates and monthly payments in order to pay off your debt in three to five years.

“Prioritize repaying high-cost credit-card debt and utilize a zero percent or other low-rate balance-transfer offer to give those debt repayment efforts a tailwind,” says McBride.

4. Other Personal Debts

While the Fed paused interest rate hikes in June 2023, you may still find it more difficult to obtain new credit, whether that be in the form of a credit card, student loan, personal loan, auto loan, or mortgage.

If you do get approved for a personal loan, expect the interest rate to be around 11 percent. As of June 7, the average interest rate on personal loans is around 11.05 percent compared to 9.38 percent in 2021. With interest rates remaining steady for now, it’s likely the interest rate on personal loans will slow as well. And if you have a better credit score, you may be eligible to access a lower borrowing rate.

If you have a loan with a floating rate, the rate pause likely means you’re not likely to experience an increase in interest payments on your debt. But for those with an adjustable-rate mortgage, you may find your monthly payments increase, but not as high as it would have been if the Fed had raised interest rates.

Learn more about DebtWave’s credit counseling and debt management services and schedule a complimentary budget analysis with one of our certified credit counselors here.