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European Central Bank President Christine Lagarde is giving a press conference following the bank’s latest monetary policy decision. The central bank left interest rates unchanged on Thursday, after implementing a cut in June.
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A view of the headquarters of the Swiss National Bank (SNB), before a press conference in Zurich, Switzerland, March 21, 2024.
Denis Balibouse | Reuters
The Swiss National Bank on Thursday trimmed its key interest rate by 25 basis points to 1.25%, continuing cuts at a time when sentiment over monetary policy easing remains mixed among major economies.
Two thirds of economists polled by Reuters had anticipated the SNB would decide in favor of a 25-basis-point-cut to 1.25%.
The Swiss franc weakened in the wake of the announcement, with the Euro gaining 0.3% and the U.S. dollar up 0.5% against the Swiss currency at 8:55 a.m. London time.
Following the Thursday decision, the Swiss central bank pegged its conditional forecast for inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026. The figures assumes a SNB interest rate of 1.25% over the prediction period.
The country’s inflation flatlined at 1.4% in May after a bump up in April and is expected to average the same level across full-year 2024, according to the SNB’s latest projections.
The Swiss bank said it now anticipates economic growth of around 1% this year and around 1.5% in 2025, anticipating slight increases in unemployment and small declines in the utilization of production capacity.
“Over the medium term, economic activity should improve gradually, supported by somewhat stronger demand from abroad,” the SNB said.
In a June 14 note, analysts at Nomura had characterized a likely cut as a “finely balanced decision” and signaled that “underlying inflation momentum has remained weak which is likely to increase the SNB’s confidence that inflation will converge to the mid-point of its inflation target.”
Switzerland already has the second-lowest interest rate of the Group of Ten democracies by a wide margin, following Japan. It became the first major economy to cut interest rates back in late March and was earlier this month followed by the European Central Bank.
But the U.S. Federal Reserve has yet to blink, and market participants will be following later in the Thursday session to see if the Bank of England takes the leap to trim, after U.K. inflation eased to the 2% target for the first time in nearly three years.
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The Federal Reserve announced Wednesday that it will leave interest rates unchanged. Fresh inflation data issued earlier in the day showed that consumer prices are gradually moderating though remain above the central bank’s target.
The Fed’s benchmark fed funds rate has now stood within the range of 5.25% to 5.50% since last July.
The central bank projected it would cut interest rates once in 2024, down from an estimate of three in March.
For consumers already strained by the high cost of living, there is an added toll from persistently high borrowing costs.
“It’s not enough that the rate of inflation has come down,” said Greg McBride, chief financial analyst at Bankrate.com. “Prices haven’t, and that is what is really stressing household balances.”
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Inflation has been a persistent problem since the Covid-19 pandemic when price increases soared to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to the highest level in decades.
The federal funds rate, which is set by the U.S. central bank, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
The spike in interest rates caused most consumer borrowing costs to skyrocket, and now, more Americans are falling behind on their payments.
From credit cards and mortgage rates to auto loans and student debt, here’s a look at where those monthly interest expenses stand.
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — nearing an all-time high.
“Consumers need to understand that the cavalry isn’t coming anytime soon, so the best thing you can do is take things into your own hands when it comes to lowering credit card interest rates,” said Matt Schulz, chief credit analyst at LendingTree.
Try calling your card issuer to ask for a lower rate, consolidating and paying off high-interest credit cards with a lower-interest personal loan or switching to an interest-free balance transfer credit card, Schulz advised.
Although 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage is just above 7%, up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.
“Going forward, mortgage rates will likely continue to fluctuate and it’s impossible to say for certain where they’ll end up,” noted Jacob Channel, senior economist at LendingTree. “That said, there’s a good chance that we’re going to need to get used to rates above 7% again, at least until we start getting better economic news.”
Even though auto loans are fixed, payments are getting bigger because car prices have been rising along with the interest rates on new loans, resulting in less affordable monthly payments.
The average rate on a five-year new car loan is now more than 7%, up from 4% in March 2022, and that’s not likely to change, according to Ivan Drury, Edmunds’ director of insights.
“Until we hit summer selldown months in the latter half of the third quarter, we should expect rates to remain relatively static during the foreseeable future,” Drury said.
However, competition between lenders and more incentives in the market lately have started to take some of the edge off the cost of buying a car, he added.
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But undergraduate students who took out direct federal student loans for the 2023-24 academic year are paying 5.50%, up from 4.99% in 2022-23 — and the interest rate on federal direct undergraduate loans for the 2024-2025 academic year will be 6.53%, the highest rate in at least a decade.
Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are already paying more in interest. How much more, however, varies with the benchmark.
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result, top-yielding online savings account rates have made significant moves and are now paying more than 5% — above the rate of inflation, which is a rare win for anyone building up a cash cushion, according to Bankrate’s McBride.
“Savers are sitting back and enjoying the best environment they’ve seen in more than 15 years,” McBride said.
Currently, top-yielding one-year certificates of deposit pay over 5.3%, as good as a high-yield savings account.
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Bank of England Governor Andrew Bailey is speaking at a press conference following the U.K. central bank’s latest monetary policy decision.
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Pramod Shenoi of CreditSights says “all of the Singaporean banks are very comfortable with their China exposure.”
03:42
a minute ago
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The Federal Reserve announced Wednesday it will leave interest rates unchanged as inflation continues to prove stickier than expected.
However, the move also dashes hopes that the Fed will be able to start cutting rates soon and relieve consumers from sky-high borrowing costs.
The market is now pricing in one rate cut later in the year, according to the CME’s FedWatch measure of futures market pricing. It started 2024 expecting at least six reductions, which was “completely fantasy land,” said Greg McBride, chief financial analyst at Bankrate.com.
That change in rate-cut expectations leaves many households in a bind, he said. “Certainly from a budgetary standpoint, not only is inflation still high but that is on top of the cumulative increase in prices over the last three years.”
“Prioritizing debt repayment, especially of high-cost credit card debt, remains paramount as interest rates promise to remain high for some time,” McBride said.
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Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to its highest level in more than 22 years.
The federal funds rate, which is set by the U.S. central bank, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.
Increasing inflation has also been bad news for wage growth, as real average hourly earnings rose just 0.6% over the past year, according to the Labor Department’s Bureau of Labor Statistics.
Even with possible rate cuts on the horizon, consumers won’t see their borrowing costs come down significantly, according to Columbia Business School economics professor Brett House.
“Once the Fed does cut rates, that could cascade through reductions in other rates but there is nothing that necessarily guarantees that,” he said.
From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at where those rates could go in the second half of 2024.
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.
Annual percentage rates will start to come down when the central bank reduces rates, but even then they will only ease off extremely high levels. With only a few potential quarter-point cuts on deck, APRs aren’t likely to fall much, according to Matt Schulz, chief credit analyst at LendingTree.
“If Americans want lower interest rates, they’re going to have to do it themselves,” he said. Try calling your card issuer to ask for a lower rate, consolidating and paying off high-interest credit cards with a lower-interest personal loan or switching to an interest-free balance transfer credit card, Schulz advised.
Although 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage is just above 7.3%, up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.
“Going forward, mortgage rates will likely continue to fluctuate and it’s impossible to say for certain where they’ll end up,” noted Jacob Channel, senior economist at LendingTree. “That said, there’s a good chance that we’re going to need to get used to rates above 7% again, at least until we start getting better economic news.”
Even though auto loans are fixed, payments are getting bigger because car prices have been rising along with the interest rates on new loans, resulting in less affordable monthly payments.
The average rate on a five-year new car loan is now more than 7%, up from 4% in March 2022, according to Edmunds. However, competition between lenders and more incentives in the market lately have started to take some of the edge off the cost of buying a car, said Ivan Drury, Edmunds’ director of insights.
“Any reduction in rates will be especially welcome as there is an increasingly higher share of consumers with older trade-ins that have sat out the market madness waiting for an automotive landscape that looks more like the last time they bought a vehicle six or seven years ago,” Drury said.
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected. But undergraduate students who took out direct federal student loans for the 2023-24 academic year are now paying 5.50%, up from 4.99% in 2022-23 — and any loans disbursed after July 1 will likely be even higher. Interest rates for the upcoming school year will be based on an auction of 10-Year Treasury notes later this month.
Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are already paying more in interest. How much more, however, varies with the benchmark.
For those struggling with existing debt, there are ways federal borrowers can reduce their burden, including income-based plans with $0 monthly payments and economic hardship and unemployment deferments.
Private loan borrowers have fewer options for relief — although some could consider refinancing once rates start to come down, and those with better credit may already qualify for a lower rate.
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result, top-yielding online savings account rates have made significant moves and are now paying more than 5.5% — above the rate of inflation, which is a rare win for anyone building up a cash cushion, McBride said.
“The mantra of higher-for-longer interest rates is music to the ears of savers who will continue to enjoy inflation-beating returns on safe-haven savings accounts, money markets and CDs for the foreseeable future,” he said.
Currently, top-yielding certificates of deposit pay over 5.5%, as good as or better than a high-yield savings account.
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Hundreds of small and regional banks across the U.S. are feeling stressed.
“You could see some banks either fail or at least, you know, dip below their minimum capital requirements,” Christopher Wolfe, managing director and head of North American banks at Fitch Ratings, told CNBC.
Consulting firm Klaros Group analyzed about 4,000 U.S. banks and found 282 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates.
The majority of those banks are smaller lenders with less than $10 billion in assets.
“Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, co-founder and partner at Klaros Group, told CNBC. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt by that stress.”
Graham noted that communities would likely be affected in ways that are more subtle than closures or failures, but by the banks choosing not to invest in such things as new branches, technological innovations or new staff.
For individuals, the consequences of small bank failures are more indirect.
“Directly, it’s no consequence if they’re below the insured deposit limits, which are quite high now [at] $250,000,” Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp., told CNBC.
If a failing bank is insured by the FDIC, all depositors will be paid “up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.”
Watch the video to learn more about the risk of commercial real estate, the role of interest rates on unrealized losses and what it may take to relieve stress on banks — from regulation to mergers and acquisitions.
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Of about 4,000 U.S. banks analyzed by the Klaros Group, 282 banks face stress from commercial real estate exposure and higher interest rates. The majority of those banks are categorized as small banks with less than $10 billion in assets. “Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, Klaros co-founder and partner at Klaros. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt.”
14:18
Wed, May 1 202410:05 AM EDT
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European Central Bank President Christine Lagarde on Tuesday said the central bank remains on course to cut interest rates in the near term, subject to any major shocks.
Lagarde said the ECB would monitor oil prices “very closely” amid elevated fears of a spillover conflict in the Middle East. However, since Iran’s unprecedented air attack on Israel over the weekend, she said the oil price reaction had been “relatively moderate.”
Her comments come shortly after the central bank gave its clearest indication to date that it could start cutting interest rates during its June meeting.
“We are observing a disinflationary process that is moving according to our expectations,” Lagarde told CNBC’s Sara Eisen on the sidelines of the IMF Spring Meetings.
“We just need to build a bit more confidence in this disinflationary process but if it moves according to our expectations, if we don’t have a major shock in development, we are heading towards a moment where we have to moderate the restrictive monetary policy,” Lagarde said.
“As I said, subject to no development of additional shock, it will be time to moderate the restrictive monetary policy in reasonably short order,” she added.
The ECB on Thursday held interest rates steady at a record high for the fifth consecutive meeting, but signaled that cooling inflation means it could begin trimming soon.
In a shift from previous language, the ECB said “it would be appropriate” to lower its 4% deposit rate if underlying price pressures and the impact of previous rate hikes were to boost confidence that inflation is falling back toward its 2% target “in a sustained manner.”
The central bank had previously made no direct reference to loosening monetary policy in its prior communiques.
Asked whether a June rate cut might be followed by subsequent reductions, Lagarde replied, “I have been extremely clear on that and I have said deliberately we are not pre-committing to any rate path.”
“There is huge uncertainty out there. … We have to be attentive to those developments, we have to look at the data, we have to draw conclusions from those data.”
Lagarde declined to comment when asked whether three ECB rate cuts this year was a reasonable expectation for market participants.
Policymakers and economists have zeroed in on June as the month when rates could start to be reduced, after the ECB trimmed its medium-term inflation forecast. Price rises in the euro zone have since cooled more than expected in March.
Asked about the central bank’s confidence in inflation continuing to fall in the wake of rising commodity prices, particularly should oil prices spike amid geopolitical tensions, Lagarde replied, “All commodity prices have an impact, and we have to be extremely attentive to those movements.”
“Clearly on energy and on food, it has a direct and rapid impact,” she added.
Earlier on Tuesday, ECB policymaker Olli Rehn said that the prospects for a June rate cut hinge upon inflation falling as expected, noting that the biggest risks to the ECB’s monetary policy stem from Iran-Israel tensions and the ongoing Russia-Ukraine war.
“As summer approaches we can start reducing the level of restriction in monetary policy, provided that inflation continues to fall as projected,” Rehn, who serves as the governor of the Bank of Finland, said in a statement.
“The biggest risks stem from geopolitics, both the deteriorating situation in Ukraine and the possible escalation of the Middle East conflict, with all their ramifications,” he added.
Israeli forces have pledged to respond to Iran’s large-scale air attack on Israel on Saturday. World leaders have called for the “utmost degree of restraint” in the aftermath of the weekend attack, amid fears of an escalation of the conflict in the Middle East.
Speculation that the ECB could soon start cutting rates comes even as investors have slashed their bets on Federal Reserve rate reductions. Traders now ascribe a 20% likelihood of a Fed rate cut in June, after yet another inflation print showed consumer prices remain sticky.
— CNBC’s Jenni Reid contributed to this report.
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The exterior of the Bank of England in the City of London, United Kingdom.
Mike Kemp | In Pictures | Getty Images
LONDON — The Bank of England on Friday announced a “once in a generation” overhaul of its inflation forecasting following a long-awaited review by former Federal Reserve Chair Ben Bernanke.
The review — initiated after criticism of the central bank’s policymaking amid spiraling inflation — sets out 12 recommendations which BOE Governor Andrew Bailey said the bank was committed to implementing.
Bailey told CNBC it had been “invaluable” to compare and contrast the U.S. policy perspective with its own.
“This is a once in a generation opportunity to update our forecasting, and ensure it is fit for our more uncertain world,” Bailey said.
Bernanke’s recommendations are organized into three key areas: improving the bank’s forecasting infrastructure, supporting decision-making within the Monetary Policy Committee (MPC) and better communicating economic risks to the public.
The provisions include scrapping the bank’s long-held “fan chart” forecasting system and introducing a revamped forecast framework.
The fan chart — which shows a range of possible future data points — has long been used by the bank to present the probability distribution that forms the basis of its inflation forecasts. The model has faced heavy criticism over recent years for failing to accurately keep track of inflationary pressures, and the review concluded that fan charts had “outlived their usefulness” and “should be eliminated.”
Bernanke stopped short of recommending Fed-style “dot plot” forecasting, which was introduced in the U.S. after the global financial crisis to allow each member to chart their course of policy stance, inflation, real GDP and employment. But he suggested a new model which better reflects the differing views of committee members and how inflation expectations can become “de-anchored.”
He also noted that the BOE currently relies more heavily on a central forecast than do other central banks, and said that its analysis should be supplemented with a wider range of alternative scenarios that “help the public better understand the reasons for the policy choice.” Such scenarios may include the effects of different policy choices, or unexpected global shocks.
The suggestion came as part of a wider set of recommendations on how the bank can improve its communications with the public, simplify its policy statement and reduce repetitiveness. The review also said that the bank should move ahead with the current modernization of the software it uses to manage and manipulate data as a “high priority.”
The Bernanke review was launched last summer to assess the bank’s struggles to accurately project the huge global spike in inflation after Russia’s invasion of Ukraine.
The bank was widely criticized for being too slow to hike interest rates, meaning it subsequently had to raise its main bank rate to a 15-year high of 5.25%.
With inflation now falling faster than the MPC had anticipated, some economists have contended that the bank is committing the same mistake in the opposite direction, by cutting rates too slowly.
Bernanke added that his role chairing the Fed during the global financial crisis highlighted the critical role of monetary policy on the real economy, but added that the review made “no judgment” of the BOE’s recent decision-making.
“The effects of the financial sector on the economy go beyond interest rates. Credibility is important. Risk-taking is important,” he told CNBC.
He also said that the difficulties in forecasting were not unique to the BOE, but added that he hoped the bank would draw appropriate lessons from the experience.
The review recommended that the bank take a phased approach to implementing the new measures, starting with improving its forecasting infrastructure. It should then “cautiously” move on to adopting changes to its policymaking and communications, it said.
Incoming BOE Deputy Governor Clare Lombardelli has been charged with leading the implementation of these recommendations when she takes her seat in July. The bank said it will provide an update on the proposed changes by the end of the year.
— CNBC’s Elliott Smith contributed to this article.
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Sergio Ermotti, CEO of Swiss banking giant UBS, during the group’s annual shareholders meeting in Zurich on May 2, 2013.
Fabrice Coffrini | Afp | Getty Images
Switzerland’s tough new banking regulations create a “lose-lose situation” for UBS and may limit its potential to challenge Wall Street giants, according to Beat Wittmann, partner at Zurich-based Porta Advisors.
In a 209-page plan published Wednesday, the Swiss government proposed 22 measures aimed at tightening its policing of banks deemed “too big to fail,” a year after authorities were forced to broker the emergency rescue of Credit Suisse by UBS.
The government-backed takeover was the biggest merger of two systemically important banks since the Global Financial Crisis.
At $1.7 trillion, the UBS balance sheet is now double the country’s annual GDP, prompting enhanced scrutiny of the protections surrounding the Swiss banking sector and the broader economy in the wake of the Credit Suisse collapse.
Speaking to CNBC’s “Squawk Box Europe” on Thursday, Wittmann said that the fall of Credit Suisse was “an entirely self-inflicted and predictable failure of government policy, central bank, regulator, and above all [of the] finance minister.”
“Then of course Credit Suisse had a failed, unsustainable business model and an incompetent leadership, and it was all indicated by an ever-falling share price and by the credit spreads throughout [20]22, [which was] completely ignored because there is no institutionalized know-how at the policymaker levels, really, to watch capital markets, which is essential in the case of the banking sector,” he added.
The Wednesday report floated giving additional powers to the Swiss Financial Market Supervisory Authority, applying capital surcharges and fortifying the financial position of subsidiaries — but stopped short of recommending a “blanket increase” in capital requirements.
Wittman suggested the report does nothing to assuage concerns about the ability of politicians and regulators to oversee banks while ensuring their global competitiveness, saying it “creates a lose-lose situation for Switzerland as a financial center and for UBS not to be able to develop its potential.”
He argued that regulatory reform should be prioritized over tightening the screws on the country’s largest banks, if UBS is to capitalize on its newfound scale and finally challenge the likes of Goldman Sachs, JPMorgan, Citigroup and Morgan Stanley — which have similarly sized balance sheets, but trade at s much higher valuation.
“It comes down to the regulatory level playing field. It’s about competences of course and then about the incentives and the regulatory framework, and the regulatory framework like capital requirements is a global level exercise,” Wittmann said.
“It cannot be that Switzerland or any other jurisdiction is imposing very, very different rules and levels there — that doesn’t make any sense, then you cannot really compete.”
In order for UBS to optimize its potential, Wittmann argued that the Swiss regulatory regime should come into line with that in Frankfurt, London and New York, but said that the Wednesday report showed “no will to engage in any relevant reforms” that would protect the Swiss economy and taxpayers, but enable UBS to “catch up to global players and U.S. valuations.”
“The track record of the policymakers in Switzerland is that we had three global systemically relevant banks, and we have now one left, and these cases were the direct result of insufficient regulation and the enforcement of the regulation,” he said.
“FINMA had all the legal backdrop, the instruments in place to address the situation but they didn’t apply it — that’s the point — and now we talk about fines, and that sounds like pennywise and pound foolish to me.”
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Federal Reserve officials at their March meeting expressed concern that inflation wasn’t moving lower quickly enough, though they still expected to cut interest rates at some point this year.
At a meeting in which the Federal Open Market Committee again voted to hold short-term borrowing rates steady, policymakers also showed misgivings that inflation, while easing, wasn’t doing so in a convincing enough fashion. The Fed currently targets its benchmark rate between 5.25%-5.5%
As such, FOMC members voted to keep language in the post-meeting statement that they wouldn’t be cutting rates until they “gained greater confidence” that inflation was on a steady path back to the central bank’s 2% annual target.
“Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent,” the minutes stated.
In what apparently was a lengthy discussion about inflation at the meeting, officials cited geopolitical turmoil and rising energy prices as risks to pushing inflation higher. They also cited the potential that looser policy could add to price pressures.
On the downside, they cited a more balanced labor market, enhanced technology along with economic weakness in China and a deteriorating commercial real estate market.
They also discussed higher-than-expected inflation readings in January and February. Chair Jerome Powell said that it’s possible the two months readings were caused by seasonal issues, though he added it’s hard to tell at this point. There were members at the meeting who disagreed.
“Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations,” the minutes stated.
That part of the discussion was partly relevant considering the release came the same day that the Fed received more bad news on inflation.
The consumer price index, a popular inflation gauge though not the one the Fed most closely focuses on, showed a 12-month rate of 3.5% in March. That was both above market expectations and represented an increase of 0.3 percentage point from February, giving rise to the idea that hot readings to start the year may not have been an aberration.
Following the CPI release, traders in the fed funds futures market recalibrated their expectations. Market pricing now implies the first rate cut to come in September, for a total of just two this year. Previous to the release, the odds were in favor of the first reduction coming in June, with three total, in line with the “dot plot” projections released after the March meeting.
The discussion at the meeting indicated that “almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected,” the minutes stated. “In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven.”
In other action at the meeting, officials discussed the possibility of ending the balance sheet reduction. The Fed has shaved about $1.5 trillion off its holdings of Treasurys and mortgage-backed securities by allowing up to $95 billion in proceeds from maturing bonds to roll off each month rather than reinvesting them.
There were no decisions made or indications about how the easing of what has become known as “quantitative tightening” will happen, though the minutes said the roll-off would be cut by “roughly half” from its current pace and the process should start “fairly soon.” Most market economists expect the process to begin in the next month or two.
The minutes noted that members believe a “cautious” approach should be taken.
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Olu Omodunbi of Huntington Private Bank expects to see “better inflation prints in the next couple of months” which would allow the Fed to start cutting interest rates in the middle of 2024
02:13
Thu, Apr 4 202410:39 PM EDT
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The Federal Reserve announced Wednesday it will leave interest rates unchanged, delaying the possibility of rate cuts as well as any relief from sky-high borrowing costs.
Overall, expectations that the Fed is pulling off a soft landing have increased, but that offers little consolation for Americans with high-interest debt.
And now there may be fewer interest rate cuts on the horizon after hotter-than-expected inflation reports sent the message that “we are moving in the right direction, but we’re not there yet,” said Greg McBride, chief financial analyst at Bankrate.com.
For consumers, that means “a very slow downward drift in savings rates but no material change in borrowing costs for credit cards, auto loans or home equity lines of credit,” McBride said.
More from Personal Finance:
Here’s when the Fed is likely to start cutting interest rates
Nearly half of young adults have ‘money dysmorphia’
Deflation: Here’s where prices fell
Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to its highest level in more than 22 years.
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.
Even with some rate cuts on the horizon later this year, consumers won’t see their borrowing costs come down significantly, according to Columbia Business School economics professor Brett House.
“The costs of borrowing will remain relatively tight in real terms as inflation pressures continue to ease gradually,” he said.
From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at where those rates could go in 2024.
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.
With most people feeling strained by higher prices, balances are higher and more cardholders are carrying debt from month to month compared with last year.
Annual percentage rates will start to come down when the Fed cuts rates, but even then they will only ease off extremely high levels. With only a few potential quarter-point cuts on deck, APRs would still be around 20% by the end of 2024, according to Ted Rossman, Bankrate’s senior industry analyst.
“If the average credit card rate falls a percentage point from its current record high of 20.75%, most cardholders would barely notice,” he said.
Although 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
But rates are already lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is near 7%. That’s up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.
Doug Duncan, chief economist at Fannie Mae, expects mortgage rates will end the year at 6.4%, but that won’t provide much of a boost for would-be homebuyers.
“The housing market is likely to continue to face the dual affordability constraints of high home prices and elevated interest rates in 2024,” Duncan said. “The problem is still supply. If rates come down and it ramps up demand and there’s no supply, the only thing that happens is that home prices go up.”
Even though auto loans are fixed, payments are getting bigger because car prices have been rising along with the interest rates on new loans, resulting in less affordable monthly payments.
The average rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, competition between lenders and more incentives in the market have started to take some of the edge off the cost of buying a car lately, said Ivan Drury, Edmunds’ director of insights.
Once the Fed cuts rates, “that gives people a little more breathing room,” Drury said. “Last year was ugly all around. At least there’s an upside this year.”
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected. But undergraduate students who take out new direct federal student loans are now paying 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.
Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are already paying more in interest. How much more, however, varies with the benchmark.
For those struggling with existing debt, there are ways federal borrowers can reduce their burden, including income-based plans with $0 monthly payments and economic hardship and unemployment deferments.
Private loan borrowers have fewer options for relief — although some could consider refinancing once rates start to come down, and those with better credit may already qualify for a lower rate.
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result, top-yielding online savings account rates have made significant moves and are now paying more than 5% — above the rate of inflation, which is a rare win for anyone building up an emergency savings account, McBride said.
Since those rates have likely maxed out, this is the time to lock in certificates of deposit, especially maturities longer than one year, he said. “There’s no incentive to hold out for something better because that’s not the way the wind is blowing.”
Currently, one-year CDs are averaging 1.73%, but top-yielding CD rates pay over 5%, as good as or better than a high-yield savings account.
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The Bank of England in the City of London, after figures showed Britain’s economy slipped into a recession at the end of 2023.
Yui Mok | Pa Images | Getty Images
LONDON — The Bank of England is widely expected to keep interest rates unchanged at 5.25% on Thursday, but economists are divided on when the first cut will come.
Headline inflation slid by more than expected to an annual 3.4% in February, hitting its lowest level since September 2021, data showed Wednesday. The central bank expects the consumer price index to return to its 2% target in the second quarter, as the household energy price cap is once again lowered in April.
The larger-than-expected fall in both the headline and core figures was welcome news for policymakers ahead of this week’s interest rate decision, though the Monetary Policy Committee has so far been reluctant to offer strong guidance on the timing of its first reduction.
The U.K. economy slid into a technical recession in the final quarter of 2023 and has endured two years of stagnation, following a huge gas supply shock in the wake of Russia’s invasion of Ukraine. Berenberg Senior Economist Kallum Pickering said that the Bank will likely hope to loosen policy soon in order to support a burgeoning economic recovery.
Pickering suggested that, in light of the inflation data of Wednesday, the MPC may “give a nod to current market expectations for a first cut in June,” which it can then cement in the updated economic projections of May.
“A further dovish tweak at the March meeting would be in line with the trend in recent meetings of policymakers gradually losing their hawkish bias and turning instead towards the question of when to cut rates,” he added.
At the February meeting, two of the nine MPC decision-makers still voted to hike the main Bank rate by another 25 basis points to 5.5%, while another voted to cut by 25 basis points. Pickering suggested both hawks may opt to hold rates this week, or that one more member may favor a cut, and noted that “the early moves of dissenters have often signalled upcoming turning points” in the Bank’s rate cycles.
Berenberg expects headline annual inflation to fall to 2% in the spring and remain close to that level for the remainder of the year. It is anticipating five 25 basis point cuts from the Bank to take its main rate to 4% by the end of the year, before a further 50 basis points of cuts to 3.5% in early 2025. This would still mean interest rates would exceed inflation through at least the next two years.
“The risks to our call are tilted towards fewer cuts in 2025 – especially if the economic recovery builds a head of steam and policymakers begin to worry that strong growth could reignite wage pressures in already tight labour markets,” Pickering added.
A key focus for the MPC has been the U.K.’s tight labor market, which it feared risked entrenching inflationary risks in the economy.
January data published last week showed a weaker picture across all labor market metrics, with wage growth slowing, unemployment rising and vacancy numbers slipping for the 20th consecutive month.
Victoria Clarke, U.K. chief economist at Santander CIB, said that, after last week’s softer labor market figures, the inflation reading of Wednesday was a further indication that embedded risks have reduced and that inflation is on a path towards a sustainable return to target.
“Nevertheless, services inflation is largely tracking the BoE forecast since February, and remains elevated. As such, we do not expect the BoE to conclude it is ‘home and dry’, especially with April being a critical point for U.K. inflation, with the near 10% National Living Wage rise and many firms already having announced, and some implemented, their living wage-linked pay increases,” Clarke said by email.
“The BoE needs data on how broad an uplift this delivers to pay-setting, and hard information on how much is passed through to price-setting over the months that follow.”
Santander judges that the Bank could decide it has seen enough data to cut rates in June, but Clarke argued that an August trim would be “more prudent” given the “month-to-month noise” in labor market figures.
This sentiment was echoed by Moody’s Analytics on Wednesday, with Senior Economist David Muir also suggesting that the MPC will need more evidence to be satisfied that inflationary pressures are contained.
“In particular, services inflation, and wage growth, need to moderate further. We expect this necessary easing to unfold through the first half of the year, allowing a cut in interest rates to be announced in August. That said, uncertainty is high around the timing and the extent of rate cuts this year,” Muir added.
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Economists expect the Federal Reserve to leave interest rates unchanged at the end of its two-day meeting this week, even though many experts anticipate the central bank is preparing to start cutting rates in the months ahead.
In prepared remarks earlier this month, Federal Reserve Chair Jerome Powell said policymakers don’t want to ease up too quickly.
Powell noted that lowering rates rapidly risks losing the battle against inflation and likely having to raise rates further, while waiting too long poses danger to economic growth.
But in the meantime, consumers won’t see much relief from sky-high borrowing costs.
More from Personal Finance:
Here’s when the Fed is likely to start cutting interest rates
Nearly half of young adults have ‘money dysmorphia’
Deflation: Here’s where prices fell
In 2022 and the first half of 2023, the Fed raised rates 11 times, causing consumer borrowing rates to skyrocket while inflation remained elevated, and putting households under pressure.
With the combination of sustained inflation and higher interest rates, “many consumers are experiencing higher levels of economic stress compared to one year ago,” said Silvio Tavares, CEO of credit scoring company VantageScore.
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
Even once the central bank does cut rates — which some now expect could happen in June — the pace that they trim is going to be much slower than the pace at which they hiked, according to Greg McBride, chief financial analyst at Bankrate.
“Interest rates took the elevator going up; they are going to take the stairs coming down,” he said.
Here’s a breakdown of where consumer rates stand now and where they may be headed:
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.
With most people feeling strained by higher prices, balances are higher and more cardholders are carrying debt from month to month compared to last year.
Annual percentage rates will start to come down when the Fed cuts rates but even then, they will only ease off extremely high levels. With only a few potential quarter-point cuts on deck, APRs would still be around 20% by the end of 2024, McBride said.
“If the Fed cuts rates twice by a quarter point, your credit card rate will fall by half a percent,” he said.
Fifteen- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy. But anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
Rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is around 7%, up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.
“Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation,” said Sam Khater, Freddie Mac’s chief economist. “In this environment, there is a good possibility that rates will stay higher for a longer period of time.”
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate and those rates remain high.
“The reality of it is, a lot of borrowers are paying double-digit interest rates on those right now,” McBride said. “That is not a low cost of borrowing and that’s not going to change.”
Even though auto loans are fixed, payments are getting bigger because car prices have been rising along with the interest rates on new loans, resulting in less affordable monthly payments.
The average rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, competition between lenders and more incentives in the market have started to take some of the edge off the cost of buying a car lately, said Ivan Drury, Edmunds’ director of insights.
Once the Fed cuts rates, “that gives people a little more breathing room,” Drury said. “Last year was ugly all around. At least there’s an upside this year.”
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But undergraduate students who take out new direct federal student loans are now paying 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.
Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are already paying more in interest. How much more, however, varies with the benchmark.
For those struggling with existing debt, there are ways federal borrowers can reduce their burden, including income-based plans with $0 monthly payments and economic hardship and unemployment deferments.
Private loan borrowers have fewer options for relief — although some could consider refinancing once rates start to come down, and those with better credit may already qualify for a lower rate.
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result, top-yielding online savings account rates have made significant moves and are now paying more than 5% — above the rate of inflation, which is a rare win for anyone building up an emergency savings account, McBride said.
Since those rates have likely maxed out, this is the time to lock in certificates of deposit, especially maturities longer than one year, he advised. “There’s no incentive to hold out for something better because that’s not the way the wind is blowing.”
Currently, one-year CDs are averaging 1.73% but top-yielding CD rates pay over 5%, as good or better than a high-yield savings account.
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Sally Yim of Moody's Ratings explains its negative outlook on China's banking system.
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Federal Reserve Chair Jerome Powell is back Thursday on Capitol Hill, offering to the Senate Banking Committee his second day of congressionally mandated testimony on the state of the economy and monetary policy.
In an appearance Wednesday before the House Financial Services Committee, the central bank chief reiterated that he expects interest rate cuts later this year but did not specify when. Instead, he said policy moves will depend on incoming data, and there isn’t enough evidence yet that inflation is headed back to the Fed’s 2% goal.
Along with hits overview, he faced questions from committee members largely focused on the proper calibration of monetary policy, as well as his views on proposed bank capital rules known as the Basel III Endgame.
The testimony is Powell’s last scheduled public appearance before the next Fed meeting on March 19-20.
Read more
Powell reinforces position that the Fed is not ready to start cutting interest rates
Key Fed inflation measure rose 0.4% in January as expected, up 2.8% from a year ago
Fed’s Waller wants more evidence inflation is cooling before cutting interest rates
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European Central Bank President Christine Lagarde is giving a press conference following the bank’s latest monetary policy decision.
It comes after the bank’s policymakers lowered their annual growth forecast, as they confirmed a widely expected hold of interest rates.
ECB staff projections now see economic growth of 0.6% in 2024, from a prior forecast of 0.8%. Their inflation forecast for the year was brought to 2.3% from 2.7%.
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Joachim Nagel, president of Deutsche Bundesbank, during the central bank’s “Annual Report 2023” news conference in Frankfurt, Germany, on Friday, Feb. 23, 2024.Â
Bloomberg | Bloomberg | Getty Images
Losses incurred by the German central bank rocketed into the tens of billions in 2023 due to higher interest rates, requiring it to draw on the entirety of its provisions to break even.
The Bundesbank on Friday reported an annual distributable profit of zero, after it released 19.2 billion euros ($20.8 billion) in provisions for general risks, and 2.4 billion euros from its reserves. That leaves it with just under 700 million euros in reserves, the central bank said.
Net interest income was negative for the first time in its 67-year history, declining by 17.9 billion euros year on year to -13.9 billion euros.
“We expect the burdens to be considerable again for the current year. They are likely to exceed the remaining reserves,” Bundesbank President Joachim Nagel said at a news conference.
The central bank will report a loss carryforward that will be offset through future profits, he said.
Nagel added: “The Bundesbank’s balance sheet is sound. The Bundesbank can bear the financial burdens, as its assets are significantly in excess of its obligations.”
The German central bank â and many of its peers â have significant securities holdings exposed to interest rate risk, which have been significantly impacted by the European Central Bank’s unprecedented run of rate hikes.
The ECB on Thursday posted its first annual loss since 2004, of 1.3 billion euros, even as it also drew on its own risk provisions of 6.6 billion euros. It follows the euro zone central bank’s near decade of financial stimulus, printing money and buying large amounts of government bonds to boost growth, which are now requiring hefty payouts.
The central bank of the Netherlands on Friday reported a 3.5 billion euro loss for 2023.
Central banks stress that annual profits and losses do not impact their ability to enact monetary policy and control price stability. However, they are watched as a potential threat to credibility, particularly if a bailout becomes a risk, and they impact central banks’ payouts to other sources.
In the case of the Bundesbank, there have been no payments to the federal budget for several years and, it said Friday, there are unlikely to be for a “longer” period of time. The ECB, meanwhile, will not make profit distributions to euro zone national central banks for 2023.
Nagel further said Friday that raising interest rates had been the right thing to do to curb high inflation, and that the ECB’s Governing Council will only be able to consider rate cuts when it is convinced inflation is back to target based on data.
On the struggling German economy, he said: “Our experts expect the German economy to gradually regain its footing during the course of the year and embark onto a growth path. First, foreign sales markets are expected to provide tail winds. Second, private consumption should benefit from an improvement in households’ purchasing power.”
Correction: The Bundesbank is 67 years old. An earlier version misstated its age.
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