The Federal Reserve announced on Wednesday that it will not reduce federal interest rates from their current 23-year high. Interest rates have remained at their highest levels since early 2001 for the last 12 months — between 5.25% and 5.5%.
The Federal Reserve implemented a series of interest rate hikes in 2022 and 2023 to combat high inflation. Chair Jerome Powell has stated the Federal Reserve's goal is to reduce inflation to an annualized rate of 2%.
As of June 2024, annual consumer inflation, as measured by the consumer price index, was 3.3%. The consumer price index weighs the costs of goods based on their importance. Items like food, shelter and energy tend to be weighted more heavily.
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Other measures of inflation, ones that don't directly impact consumers, show the inflation rate dropping below 3% in recent months.
The consumer price index rose by 4.7% in 2021, 8% in 2022 and 4.1% in 2023. In the last 20 years, consumer inflation has increased by 3.1% per year on average.
The Federal Reserve said that inflation numbers were heading in the right direction. It is possible that interest rates will be lowered at its next meeting in September.
"Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low," the Federal Reserve said in a statement. "Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee's 2% inflation objective."
What impact do high interest rates have on consumers?
Experts have said that the federal interest rate has the largest effect on car loans and similar large purchases.
Mortgage rates, although not directly tied to the federal interest rate, also reached a 23-year high last year, and any future drop in interest rates would likely trickle down to Americans looking to buy a home. Mortgage rates have generally hovered around 7% in the U.S. in recent months.
A drop in mortgage rates, however, could cause housing prices to go back up.
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During the final quarter of 2022, the median sale price in the U.S. was $442,600. In the second quarter of 2024, the median sale price had dropped to $412,300.
Federal data shows that in general, when mortgage rates fall, housing prices go up.
Mortgage rates were below 3% for the first time on record in late 2020 and much of 2021. During this time, the median house price jumped from $317,100 in the second quarter of 2020 to $414,000 by the end of 2021.
