Fed holds rates steady as consumers grapple with high costs

[UNITED STATES] The Federal Reserve announced Wednesday that it will leave interest rates unchanged, citing the impact of President Donald Trump’s tariff policies and the ongoing slowdown in economic growth.

Jerome Powell, the chair of the Federal Reserve, is “sitting on a hornet’s nest of headaches,” according to Brian Bethune, an economist and professor at Boston College. “In that situation, he’s going to hold tight,” Bethune added.

Bethune emphasized the uncertainty in the current economic climate, noting that mixed economic signals and the shifting nature of U.S. tariff policies have created a “black swan” level of unpredictability. “We are as close to a ‘black swan’ policy shock as you can get,” he said.

Global markets have reacted cautiously to the Fed’s decision, with stock indices fluctuating as investors assess the potential long-term effects of high rates. While the U.S. economy remains resilient, analysts warn that the combination of ongoing trade tensions and persistent inflation could weigh on corporate earnings and consumer confidence in the months ahead.

Despite the Fed’s decision to keep rates steady, consumers already grappling with high prices and borrowing costs are not expected to see much relief anytime soon, experts say.

The federal funds rate, which determines what banks charge each other for overnight loans, also influences most of the borrowing and savings rates that consumers encounter daily. When the Fed raised rates in 2022 and 2023, interest rates on consumer loans quickly followed. Although the central bank lowered its benchmark rate three times in 2024, those consumer rates remain high for now.

Economists also highlight the lag effect of monetary policy, meaning the full impact of today’s rate decisions might take months to ripple through the economy. This delay complicates the Fed’s ability to respond swiftly to emerging risks, such as a slowdown in hiring or a sudden spike in energy prices due to geopolitical tensions.

Five Ways the Fed Impacts Your Wallet

Credit Cards:

Many credit cards have variable rates directly tied to the Fed’s benchmark rate. With a rate cut unlikely before July, the average credit card APR has remained just above 20% this year, according to Bankrate — close to 2024's all-time high. Last year, banks raised credit card rates to record levels, with some issuers keeping those elevated rates in place.

“At the same time, more people are carrying debt because of higher prices,” said Ted Rossman, senior industry analyst at Bankrate. Credit card debt and average balances are at record levels.

Mortgages:

Although mortgage rates don’t directly follow the Fed’s moves, they are influenced by Treasury yields and broader economic trends. As a result, uncertainty around tariffs and the possibility of a recession have caused mortgage rates to dip slightly.

As of May 6, the average rate for a 30-year fixed mortgage was 6.91%, while the 15-year fixed rate was 6.22%, according to Mortgage News Daily. "Mortgage rates are showing signs of life after a slow couple of years," said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.

However, the decrease in rates has been insufficient to spur a housing market rebound. "Many borrowers are hesitant to take on a loan at current rates, especially if they already have a mortgage with a much lower rate," Raneri noted.

Auto Loans:

Auto loan rates are influenced by several factors, with the Fed playing a key role. With the benchmark rate unchanged, the average rate on a five-year new car loan was 7.1% in April, while the average rate for used car loans stood at 10.9%, according to Edmunds. At the end of 2024, these rates were 6.6% and 10.8%, respectively.

With both interest rates and car prices near historic highs — compounded by Trump’s 25% tariffs on imported vehicles — new car buyers are facing higher monthly payments and affordability challenges. "The auto industry is preparing for further disruptions," said Edmunds’ consumer insights analyst Joseph Yoon, who pointed out that tariffs could create supply chain bottlenecks and inventory shortages later this year.

Some buyers are postponing purchases in hopes of clearer policy direction, while others are opting for longer loan terms to offset the higher costs, a trend that could lead to increased debt burdens.

Student Loans:

Federal student loan rates are fixed for the life of the loan, meaning most borrowers are somewhat insulated from Fed actions and recent economic turmoil. Interest rates for federal loans taken out in the 2024-2025 school year will be based partly on the May auction of the 10-year Treasury note, and are expected to fall slightly, according to higher education expert Mark Kantrowitz.

Undergraduate students who took out direct federal loans for the 2024-2025 school year will pay 6.53%, up from 5.50% in 2023-2024. Borrowers with existing federal student loans won’t see any rate changes, adding to the financial pressures they are already facing, especially with fewer loan forgiveness options available.

Savings:

While the Fed doesn’t directly control deposit rates, they tend to move in tandem with changes in the target federal funds rate. "High interest rates are discouraging for those with debt but great for savers," said Matt Schulz, chief credit analyst at LendingTree.

Yields for CDs and high-yield savings accounts are no longer as high as last year, but with the Fed holding off on rate cuts, they remain above the annual inflation rate. According to Bankrate, top-yielding online savings accounts currently offer an average return of 4.5%. "Given the uncertainty in the economy right now, it makes sense for people to lock in CD rates and take advantage of high-yield savings accounts while they can," Schulz said.