It feels like a case of history repeating itself: The Federal Reserve is expected to maintain its current stance on interest rates at its upcoming monthly meeting on Wednesday, keeping them at a 23-year high. Speculation is rife about when the Fed might start reducing rates.
If this prediction holds true, the central bank's key short-term rate will remain at 5.25% to 5.5%, representing low-risk investments that are tied to inflation and are considered a safe option during volatile times. The Treasury resets interest rates for I bonds in May and November, valid for six months.
The current interest rate for I bonds stands at 4.28%, as announced this week. This rate will remain in effect for bonds purchased today until October 31. I bonds, issued by the government, are regarded as relatively dependable investments, especially during periods of high inflation, as seen in recent years. The bond's interest rate consists of a fixed portion and a variable portion tied to inflation.
It's advisable to hold onto I bonds once purchased, as cashing them out before a year will result in a penalty of three months' interest for bonds less than five years old. After the Fed's decision on interest rates, the next question is: What does this mean for consumers?
Federal actions on interest rates have wide-reaching effects on the economy, impacting mortgages, auto loans, credit cards, and the annual percentage rate (APR) on any loan. While the interest rate is what borrowers pay lenders to borrow money (expressed as a percentage), the APR includes the interest rate plus any additional fees, making it generally higher.
One positive note for consumers: The APR on new credit cards remained stable at 24.66% in April after almost two years of increases, according to Matt Schulz, a credit analyst at the rate comparison site LendingTree.
Unfortunately, this rate is tied for the highest since LendingTree began tracking monthly rates in 2019 and is unlikely to decrease with the Fed keeping rate cuts on hold, Schulz noted. The Fed's meeting this week is the first since recent high inflation readings, which have tempered expectations of three rate cuts this year.
At the conclusion of the two-day meeting starting Tuesday, the Fed is expected to maintain its key short-term interest rate at a 23-year high of 5.25% to 5.5%. While Fed officials are not scheduled to update their March forecasts on the economy, inflation, and rates, Fed Chair Jerome Powell could offer insights into the future direction of interest rates.
Interest rates have been at a standstill for months. Initially, forecasters anticipated the first rate cut in June, followed by three decreases in 2024. Now, they predict only one cut, likely in September.