For the fifth consecutive time, the Federal Reserve voted to hold its benchmark overnight borrowing rate steady. But the decision made at the July meeting was not one with unanimous support. Three of the committee’s 12 policymakers voted for a rate hike, as inflation continues to run above the Fed’s longstanding 2% target.
At least for now, the U.S. borrowing rate remains where it has since January, in the range of 3.50% to 3.75%. However, the “dissents underscored how pressure is building inside the central bank to act on inflation that has run above its target for five years,” said The Wall Street Journal. That has been compounded by the ongoing U.S.-Israel war with Iran, President Trump's tariffs and investor anxiety around AI.
What will the Fed do next?
The statement the Federal Reserve released following its July meeting didn’t provide many clues about next steps. “There was an unusual lack of clarity about the Fed’s next move, as the economic outlook remains clouded by conflicting signals and a lack of guidance from Fed Chairman Kevin Warsh,” said CNN.
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At a post-meeting press conference, Warsh did “make clear that the Fed is not just sitting idle even as it holds rates steady,” said The New York Times. “Where necessary and appropriate, we will not hesitate to act,” Warsh said, reaffirming the Fed’s 2% target for inflation.
There is a very real possibility that pressure from within the Federal Open Market Committee (FOMC), not to mention the markets, could result in a rate hike. The members who dissented at July’s meeting favored a quarter-point rate increase.
When is the next interest rate decision?
The Federal Reserve will next meet Sept. 15-16. While new Fed Chairman Warsh is reticent to offer clear-cut guidance, “among interest rate traders, there is a broad consensus that the Fed will raise rates at least once before the end of the year,” said NBC News. “According to CME FedWatch, Fed Funds futures contracts point to a 90% probability that rates will be at least 0.25% higher by January.”
How do interest rates affect the economy?
The Fed uses interest rates to either stimulate or rein in economic activity. Generally, the theory is that “cutting rates decreases borrowing costs, prompting businesses to take out loans to hire more people and expand production,” which “in turn, stimulates economic activity and growth,” said Investopedia. “Conversely, when the economy is overheating, the Fed may raise rates to cool things down and prevent inflation from spiraling out of control.”
What do rate changes mean for your wallet?
Beyond broader economic implications, the Federal Reserve’s decisions also hold significance for your finances.
When rates are cut, that provides “some welcome relief for consumers who are in the market for a home or auto purchase, as well as for those carrying pricey credit card debt,” said CBS News, by lowering interest rates on those products. On the other hand, rate cuts “could also have a downside of shaving the relatively high returns recently enjoyed by savers.”
Meanwhile, when the Fed decides to raise rates, it usually has the inverse effect, in that it will typically lead interest rates on credit cards, auto loans and variable rate mortgages to go up. The good news with rate hikes, though, is that “savings accounts tend to earn more interest,” said LendingTree.
