A couple looking worried about money, with a laptop and bills.
If you’re been trying to sign a personal loan, auto loan, or pretty much any type of loan, then you may be painfully aware of just how expensive it is to do that these days. And there’s a reason for that.
In 2021, inflation started to climb, and in 2022, it downright soared. Recognizing the severity of the situation, the Federal Reserve began implementing interest rate hikes in early 2022 and continued to do so well into 2023. The goal was to drive consumers to spend less, thereby bridging the gap between supply and demand that drove inflation levels upward.
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During 2023, inflation managed to cool to a notable degree — so much so that the Fed paused its interest rate hikes at its last few meetings. The Fed has also signaled that interest rate cuts could be in store for 2024. Once that happens, the cost of borrowing is likely to come down across the board. And that could be a personal finance lifeline for consumers.
But recent inflation data tells us that interest rate cuts may still be a ways off. And that could deal a blow to consumers who really can’t wait to borrow money.
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Why rate cuts may not happen right away
The Federal Reserve does not set consumer interest rates directly. Rather, it oversees the federal funds rate, which is what banks charge each other for overnight borrowing.
But when the federal funds rate rises, it tends to drive the cost of borrowing up as well. So these days, consumers are looking at higher costs for a variety of loan products, as well as higher credit card interest rates.
On the plus side, savers are making out like bandits via the higher interest rates savings accounts and CDs are paying. But all told, today’s higher interest rate environment is causing a lot of consumers to struggle.
The Fed has indicated that it will be ready to cut rates once inflation cools to a notable degree. That should, in turn, drive the cost of borrowing downward.
But January’s Consumer Price Index, which measures changes in the cost of consumer goods and services, measured annual inflation at 3.1%. Inflation also rose 0.3% on a monthly basis.
Meanwhile, the Fed has long taken the stance that 2% annual inflation is the optimal level it likes to target. And since 3.1% is a ways off from 2%, it could be a while until the central bank decides it is ready to move forward with interest rate cuts.
The one silver lining
Many consumers might be in a bad place due to the high cost of borrowing today. The one silver lining from January’s inflation report is that if the Fed holds off on cutting rates, savers with money in the bank may be able to benefit from higher interest rates on their money for a bit longer than expected.
But still, those who really can’t put off taking out loans — for example, anyone needing to finance a car purchase — remain in a tough spot. If you need to borrow and can’t wait for rate cuts to happen, at the very least, try to boost your credit score before putting in a loan application. The higher that number is, the more competitive an interest rate you’re likely to snag.
You can boost your credit score fairly quickly by paying off a chunk of credit card debt (which may be easier said than done) and checking your credit report for errors. If your credit card accounts are in good standing and your income has risen since you applied for your cards, you may also be able to snag a credit limit increase. That, too, could help your credit score improve provided you don’t add to your existing balances, and it may be an easier route to take than attempting to pay those balances off.
In time, the Fed is likely to start cutting interest rates. But don’t be surprised if that doesn’t happen until the second half of 2024.
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