Fed holds rates steady as inflation and trade wars squeeze consumers

[UNITED STATES] Amid stronger-than-anticipated job growth and persistent inflation, the Federal Reserve is set to keep interest rates unchanged following its two-day meeting this week, despite calls for action from former President Donald Trump.

The Fed's decision comes at a time of economic uncertainty. While job gains remain strong, wage growth has struggled to keep up with inflation, leaving many workers facing financial strain. Global challenges, such as geopolitical tensions and shifting commodity prices, further complicate the Fed’s decision-making process.

“Consumers have been waiting for years to see pricing come down. NO INFLATION, THE FED SHOULD LOWER ITS RATE!!!” Trump wrote in a post on Truth Social Friday.

As an independent body, the Federal Reserve has always made its decisions apart from the political sphere, with Chair Jerome Powell consistently emphasizing that monetary policy is driven by economic conditions, not political influence. Trump's new trade policies, however, present another hurdle to rate cuts, as economists predict that the tariffs could lead to rising prices, further clouding inflation forecasts.

Some analysts believe the Fed's cautious stance reflects the delicate balancing act it faces—managing inflation while avoiding a recession. “The Fed is walking a tightrope,” said Diane Swonk, chief economist at KPMG. “They don’t want to overcorrect and stifle growth, but they also can’t ignore the persistent inflationary pressures fueled by supply chain disruptions and labor shortages.”

Many Americans continue to feel the pinch from high prices and borrowing costs, while the potential inflationary effects of a costly trade war weigh on household budgets.

“Consumers are always the ones who pay the price,” said Eugenio Aleman, chief economist at Raymond James. The federal funds rate, which dictates what banks charge one another for overnight loans, also has an impact on consumer borrowing and savings rates.

“Uncertainty reigns amid a trade war and the unpredictable landscape of tariffs,” said Greg McBride, chief financial analyst at Bankrate. “But with consumer spending and employment holding steady, the Fed is likely to remain on the sidelines.”

Recent surveys show a slight dip in consumer confidence, driven in part by high inflation expectations. This could reduce consumer spending, particularly on big-ticket items like homes and cars, which are already feeling the pressure of rising financing costs.

Markets now anticipate that the Fed will hold off on cutting rates until July, with potentially two or three more reductions by the end of the year. If the federal funds rate is lowered, borrowing costs could ease across various forms of consumer debt, including auto loans, credit cards, and mortgages, making credit more accessible.

Here’s a closer look at how it all works:

Credit Cards

Most credit cards feature variable rates tied directly to the Fed's benchmark. So far this year, the average annual percentage rate (APR) has hovered just over 20%, close to last year’s record highs.

However, it’s not just the Fed’s decisions affecting credit card rates. “Banks are wary of the economic uncertainty and its potential impact on consumers,” said Matt Schulz, chief credit analyst at LendingTree.

To minimize risk, banks often increase interest rates on credit cards, and with record-high credit card debt, this remains a significant challenge for consumers struggling with high prices.

Mortgages

Although mortgage rates for 15- and 30-year loans are generally tied to Treasury yields and broader economic trends, uncertainty surrounding economic policies and Trump’s tariff proposals has kept rates from falling further, according to the Mortgage Bankers Association.

The average rate for a 30-year, fixed-rate mortgage stands at 6.81%, down from 7.04% at the beginning of the year, according to Bankrate. But for prospective homebuyers, the decline hasn't been enough to energize the housing market. “Unfortunately for homebuyers this summer, rates are likely to stay in this range for the near future,” said Schulz.

Auto Loans

Auto loan rates have remained relatively stable, though car payments have increased as vehicle prices rise. Additionally, Trump's 25% tariffs on imported vehicles are putting additional pressure on car prices.

Currently, the average rate on a five-year new car loan is 7.33%, slightly down from 7.53% in January, according to Bankrate. But inventory shortages are also pushing consumers to buy vehicles before prices increase further due to tariffs. “There’s definitely a lot of pain in that market,” said Ted Rossman, senior industry analyst at Bankrate.

Student Loans

Federal student loan rates remain fixed for the duration of the loan, offering some protection from changes in the Fed’s policy and economic volatility. Interest rates for the 2024-2025 school year will be influenced by the May auction of the 10-year Treasury note, and borrowers can expect a slight increase. For undergraduate students taking out direct federal loans, the rate will rise to 6.53%, up from 5.50% last year.

However, many borrowers are grappling with fewer federal loan forgiveness options and facing higher costs.

Savings

On a positive note, high-yield online savings accounts continue to offer attractive returns, with some paying as much as 4.5%, according to Bankrate. While the Fed does not directly control deposit rates, these yields tend to mirror changes in the federal funds rate, so holding rates steady has kept savings rates elevated for now.

However, economists caution that savers shouldn’t rely on these rates for the long term. “If the Fed begins cutting rates later this year, those high-yield savings account rates are likely to drop,” said McBride. “Now is the time to lock in the best rates while they last.”

“For consumers, one of the best ways to protect finances during uncertain times is to focus on building emergency savings and reducing high-interest debt,” advised McBride. “This will provide a buffer in case of income disruptions or unforeseen expenses, protecting you from expensive borrowing costs.”