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Expect more stable Fed rates in 2019 after latest hike

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fed-update-articleFEDERAL-FUNDS-RATE TARGET: 2.25 to 2.50 percent


The Federal Reserve managed to thread a difficult needle -- it passed the independence test while also acknowledging recent concerns about rising interest rates.

The Fed announced on December 19 that it would be raising rates by a quarter of a percent, to a target range of 2.25 to 2.50 percent. While this was widely expected, the decision was complicated by recent stock market volatility as well as some high-profile criticism over the pace of recent rate increases, most notably from the White House.

Still, while not diverting from its course, the Fed may have provided some reassurance to those who want a gentler slope of rate increases next year.

A gentler slope for Fed rates in 2019

Beginning in December of 2017, the Fed has raised interest rates by a quarter of a percent in every other meeting for a total increase of 1.25 percent. Critics of this policy fear that such an assertive pace of rate increases could dampen economic growth. As a side-effect, rate increases can also have a negative impact on stock valuation.

Of course, the Fed is responsible for making rate decisions based on economic data and long-term policy. It cannot bend to even the most prominent critics and, while it must have some level of concern about stock market volatility, it cannot base rate decisions on propping up investors.

The good news for the critics is that they are almost guaranteed to see a gentler upward slope to Fed rates in 2019. Between actions already taken and a slight reduction in the Fed's new long-term rate projection (also released on December 19), much of the gap between current rates and a level the Fed considers normal has already been closed.

The Fed lowered that long-term rate projection to 2.8 percent, down from the previous 3.0 percent projection released after its September meeting. With the new rate target range of 2.25 to 2.50 percent, this suggests that, barring unforeseen circumstances, it would only take another 0.50 percent or so rate increase to return rates to normal. Even if this all took place in 2019, it would represent half the pace of 2018's total rate increase.

Of course, plenty of things could happen over the next year to change this course -- a flare-up of inflation could prompt faster rate increases, while a quick deterioration of economic growth could prompt a flatter or even downward direction for rates.

What does this mean for consumers?

For consumers, often the most important thing about Fed rate decisions is not so much what they did but why they did it. Fed rates don't directly control most of the rates consumers pay on things like mortgages and car loans, nor the rates they receive on their savings and money market accounts. However, the things the Fed bases its decisions on -- primarily economic growth and inflation -- have a major impact on the interest rates consumers experience.

So, what does today's decision say about growth and inflation, and what does that mean for consumers?

The Fed reaffirmed its confidence in the job market and noted that inflation seems fairly stable. If these conditions continue, consumers should expect some interest rates to continue to rise -- but, like the Fed funds rate, these increases could be at a slower pace in the year ahead:

  • Savings accounts, money market accounts and CDs
    Rates on deposit accounts have been slow to follow Fed rates higher, though a few banks have led the way with much faster rate increases. Given that the average deposit account rate is still below the rate of inflation, it would be reasonable to expect rates to continue to rise. However, rate increases may continue to come grudgingly from most banks; so if you really want to benefit from rising rates, you need to actively shop for one of the banks leading the way in rate increases.

  • Credit cards
    Credit card rate increases have outpaced Fed rate increases in recent years, and credit card rates are already above historical norms. This suggests they should flatten out -- though if credit card defaults pick up, card issuers may continue to raise rates to protect themselves.

  • Mortgages
    Mortgage rates have already seen their biggest year for rate increases since the mid-1990s, but they are still well below historical norms. Even so, it may take a flare-up of inflation to trigger much in the way of additional rate increases over the next year.

The Fed -- and Fed watchers -- can now relax a bit until the next meeting in late January. However, consumer rates are subject to change at any time, so consumers should remain vigilant about interest rate changes.


Previous Federal Reserve Board Update Articles:

FOMC Date2018 FOMC Meeting Update Articles
11/11/2018Look for bank rates to move even as Fed stands pat
9/26/2018September 2018: Rate hike may hurt more than help consumers
8/1/2018Banks aren't waiting for Fed rate increases
6/13/2018Your strategy when the federal funds rate rises
5/2/2018Interest rates surge despite Fed's inaction
3/21/2018Fed rate increases not helping consumers
1/31/20183 ways to profit when market rates outpace the Fed
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