What does the Federal Reserve interest rate pause mean to California consumers?
Don’t be fooled. While the Federal Reserve didn’t raise interest rates Wednesday — the first pause in more than a year — consumers still face rates higher than they’ve seen in years.
And more could be on the way.
“This doesn’t mean that the Fed is going to start cutting rates, or that other rate hikes this year are completely out of the question,” said Jacob Channel, senior economist at LendingTree, which tracks interest rates.
“Instead, it just means that they may be willing to hold rates where they are and let the economy continue to settle without more rate-related prodding in the immediate future,” he said.
That means mortgage interest rates, which in California have been between 6% and 7% recently on 30-year loans, will probably remain in that range. It means historically high rates on credit card interest will probably stay that way.
The Fed had raised its key rate 10 times in the previous 14 months, aiming to ease inflation by cooling consumer demand.
But the economy has continued to grow, job creation has remained robust, and the rate of inflation is nowhere near the Fed’s 2% goal. It has come down — from an annualized rate of 9.1% a year ago to 4% in the last 12 months.
That was enough to give the Fed room to pause its interest rate increases Wednesday.
“Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated,” it said in a statement.
But it also hinted that more increases could be on the way, perhaps as soon as this summer.
“Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the statement said.
California mortgage rates
Home sales in the state are down in 2023, due primarily to the rise in interest rates and tight housing supply. But prices are also down, and are expected to remain below last year’s level.
In California, the median price of a home sold in the state in April was $815,000. If someone borrowed 80% at 6.39%, the average rate in mid-April, the monthly mortgage payment, including taxes and fees, would be $5,011. If the rate hit 7%, it would climb to $5,275.
The California Association of Realtors estimates that the median home price this year should drop to $776,600, down from last year’s median price of $822,300.
In Sacramento, the median dropped from $570,000 in April 2022 to $515,000 this year. In Fresno, the decline was from $425,000 last April to $413,000 a year later.
Freddie Mac estimated last week that the average 30-year fixed-rate mortgage was 6.71%, down slightly from the previous week’s 6.79%. Last year at this time, the rate averaged 5.23% but rose as high as 7.08% in the fall.
Credit card interest
The average annual percentage rate on a new credit card offer today is 23.98%, according to Matt Schulz, chief credit analyst at LendingTree.
“The truth is that today’s credit card rates are likely as high as they’ve been in decades, and they’re probably going to still creep higher in the immediate future, even though the Fed chose not to raise rates this month,” he said.
That means for a Californian with $5,000 in credit card debt on a card with a 23.98% APR and a $250 monthly payment, they’ll pay $1,448 in interest and take 26 months to pay off the balance.
For people already holding credit cards, the average APR for a card that was assessed interest was 20.92%, the highest since the Fed began logging such data in 1994.
“It will likely climb in the immediate future, no matter what the Fed did,” Schulz said.
That means that for a consumer with $5,000 in credit card debt on a card with a 20.92% APR and a $250 monthly payment, they will pay $1,202 in interest and take 25 months to pay off the balance.
This story was originally published June 14, 2023 at 3:38 PM with the headline "What does the Federal Reserve interest rate pause mean to California consumers?."
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