February 29, 2024

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What does the federal reserve rate stop mean for your money

There’s a horror movie cliche that looks a lot like the Federal Reserve’s recent interest rate halt.

You know how it goes. Near the end of the film, there is a moment of relief when the villain is taken out, usually in some gruesome fashion.

But then the serious music starts. She jumps after realizing the killer is still supernaturally alive, indicating more danger to come.

That’s the story We live with the Fed’s relentless pressure to beat inflation.

The Fed left interest rates unchanged this week but noted that inflation remains a scary number in our economy. She suggested that the interest rate pause might be short-lived.

Inflation fell further in May but remained above normal levels

“The process of lowering inflation will be gradual,” Federal Reserve Chairman Jerome H. Powell said during a press conference on Wednesday. “It will take some time.”

So what does this mean for your money?

I had a conversation with Frank Litky, CEO and President of Ally Invest Securities, about the next step in this horror show, which has made buying a home, buying a used or new car, and paying down debt more expensive.

Here are four notes from the Federal Reserve’s latest interest rate decision.

Consumer prices are still stubbornly high

Powell said the Fed “fully understands that high inflation imposes hardship because it undermines purchasing power, especially for those least able to meet the higher costs of necessities like food, housing, and transportation.”

A year ago, the consumer price index reached a 40-year high of 9.1 percent on an annual basis. Since then, amid 10 consecutive interest rate hikes by the Fed, the rate of inflation has been falling.

Prices rose 4 percent year over year in May, according to the US Bureau of Labor Statistics.

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The Fed wants to bring inflation back to 2 percent.

Don’t look at the Fed’s pause as a sign that we’re out of the woods just yet, Lietke said. He noted that the decline in inflation since last year may feel like a relief, but many consumer goods and services are still painfully high.

The cost of used cars and trucks increased by 4.4 percent. Auto insurance rose 2%. Clothing and personal care items also saw increases in May.

“Price stability is the responsibility of the Fed,” Powell said. “Without price stability, the economy doesn’t work for anyone. In particular, without price stability, we will not achieve a sustainable period of strong labor market conditions that benefit everyone.”

Get ready for more price hikes

Here the nocturne begins.

“It would be appropriate to make some additional price increases this year,” Powell said.

Litky said there could be a rate hike as soon as July.

“I think the Fed recognizes that there will likely be a need for further tightening or rate hikes absent some other massive economic event to bring this inflation number under control,” he said. “We see it now going on for a longer period of time into 2023. And as long as that number remains at that higher level, I think the Fed will be pushed and really pushed to continue to increase.” rates.”

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If higher rates are coming, that means higher borrowing costs on big-ticket items.

From buying a home to a new car, locking in a fixed interest rate now before rates go up again can save you money in the long run. The average rate for a 30-year mortgage was 6.69 percent as of Thursday, according to Freddie Mac. A year ago, the rate was 5.78 percent. But for the same period in 2021, the 30-year straight rate was 2.93.

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“Housing has been debugged a bit, however “I think if someone waits for a mortgage rate of 2 to 3 percent, again, I don’t expect that to happen in the near future,” Litke said. “Given where rates are expected to go in July, they could go up again.”

Before making a major purchase, consider your personal financial situation.

Are house prices going down? See how it is in your area.

“If you find your dream home and it fits your budget and is good for you or your family, don’t let perfection be the enemy of good,” Litke said.

If mortgage rates drop, you have the option of refinancing. The same applies if you need to buy a car.

And if you can afford it, brag. Don’t let your economics and worries about money keep you from paying for some needs.

“Make trade-offs and sacrifices, because the moment you eliminate desires, people can feel a sense of misery,” Litke said.

Things are getting better, but you may need to cut back on unnecessary purchases.

In this inflationary environment, reconsider how you allocate your income.

As the cost of goods and services increases, you will pay more of your money for necessities. As a result, you might consider cutting back or even cutting back on saving for retirement or building up an emergency fund.

There is a widening spending gap between retirees and young adults

“The last thing you want to do for your long-term plan is throw away savings,” Litky said.

If you can, don’t let high expenses derail your savings goals.

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Understandably, if you live paycheck to paycheck, there might not be anything extra to spare. But you can plan for a time when your financial situation will improve.

Ask yourself: Where do you want to be in one, three, five years?

Then make a plan that may include enhancing your job skills or increasing your income. Or set a goal to save even a small amount of money each month, Litke suggests.

Small wins have a huge motivating effect people,” he said. “It’s about making that plan.”

BOM – Michelle Singletary’s Best in Personal Finance

If you have a question about Washington Post columnist Michelle Singletary’s personal finance, please call 1-855-ASK-POST (1-855-275-7678).

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