Today’s Positive Inflation News Didn’t Sway the Fed, Which Held Steady on Interest Rates

As expected, this morning’s lower-than-expected inflation numbers weren’t enough to convince the Federal Reserve to lower interest rates today. Instead, the Fed reduced the number of cuts it expects to make in 2024 to one, down from the three it had penciled in at the end of 2023.

The Fed decided on Wednesday to hold the federal funds rate at a target range of 5.25% to 5.50% after the Consumer Price Index reported that inflation was flat month over month in May, less than the expected 0.1% increase.

But inflation still currently sits at 3.3% year over year. Inflation reheated this winter and remains higher than it was in January when it clocked in at 3.1%.

“So far this year, the data have not given us that greater confidence,” Powell said at the press conference following the meeting.

Moving inflation sustainably toward the central bank’s goal of 2% will likely require more than a month or two of lower inflation reports, noted Gregory Heym, chief economist at real estate service company Brown Harris Stevens.

“There are many people who think September might be an option, but my guess would be November or December would be more likely,” Heym told CNET in an email.

With just four meetings left this year -- in July, September, November and December -- the window is closing for any cuts.

Fed Day Live Blog: Stay up to date on inflation news, the Fed’s rate decision and expert takes on what’s next.

Why hasn’t the Fed lowered interest rates?

Raising interest rates is one of the primary strategies the Fed can use to help control inflation, which has hovered around 3% this year, above the Fed’s target rate of 2%

The Fed is tasked with striking a balance between economic growth and rising prices. When inflation spiked in 2022, the Fed attempted to rein in soaring prices by raising the federal funds rate -- that’s the interest rate banks charge each other for borrowing and lending. Raising the federal funds rate makes borrowing more expensive for both businesses and individuals, thus slowing down the economy. 

But persistent inflation and a strong jobs market -- the Bureau of Labor Statistics reported last week that the US added 272,000 jobs, which was well above estimates -- hasn’t given the Fed much in the way of evidence that the economy needs interest rate cuts.

However, if interest rates remain too high for too long, it could create a drag on the economy as employers pull back on hiring and consumers stop spending. And while two CPI reports do not make a trend, if inflation continues to abate through the summer, the Fed might consider it the evidence it needs to make at least one interest rate cut. 

Many experts expect the Fed will begin dropping rates by the end of 2024, so long as inflationary pressures continue to ease.

How the Fed’s interest rate decision affects your money

Overall, it’s unlikely we’ll see relief from high interest rates any time soon. That means you can expect borrowing to remain high, but savings rates will also stay elevated.

Mortgages: Don’t expect to see average mortgage rates drop for a while. But if you’re ready to buy a home, don’t let interest rates alone dictate your decision.

Savings: If you don’t have an emergency fund, now is a good time to start setting aside even a little bit each month to grow your savings. And the good news is that savers can take advantage of higher interest rates by stashing their money in CDs or high yield savings accounts -- the top ones currently offer APYs of 5% or more.

Credit cards: Credit card debt will remain expensive, regardless of how the Fed votes on the federal funds rate. Prioritize paying off debt as quickly as you can and avoid taking on more if at all possible.

Everyday spending: If you’re feeling the pinch of inflation for regular expenses, don’t expect much relief soon. But we have tips to save on everyday essentials like groceries and there’s a little relief in site as retailers like Target have announced price cuts this summer.