The threat of another Federal Reserve rate increase is fading quickly, giving consumers some breathing room after months of uncertainty over whether borrowing costs were about to move higher again.
In a Reuters poll conducted August 12 through 17, 94 of 104 economists said they expect the Federal Reserve to leave its benchmark rate unchanged at 3.50% to 3.75% at its September meeting. Roughly 80% expect the Fed to keep rates at that level through the end of 2026.
That is a significant shift from only a few weeks ago, when persistent inflation and higher energy prices had made another rate increase look increasingly likely.
The change has come from three places at once: consumers are spending less, inflation has cooled and the labor market has weakened.
Retail sales unexpectedly fell 0.6% in July, the first decline in nine months. Consumer inflation rose only 0.1% for the month, while the unemployment picture deteriorated enough to make another rate increase harder to justify.
Markets have reacted accordingly.
Traders now put the probability of a September rate increase at roughly 31%, down from about 55% only a week earlier. That does not mean a hike is impossible. It means investors increasingly believe the Fed can afford to wait.
For households, that distinction matters.
The federal funds rate does not directly set the interest rate on a mortgage, credit card or auto loan, but it sits near the center of the borrowing-cost system. When the Fed raises rates, variable-rate debt generally becomes more expensive and banks tend to demand higher returns on new lending.
Another pause would therefore remove one immediate source of pressure.
Credit-card borrowers are among the most exposed. Most card rates are variable and closely linked to the prime rate, meaning another Fed increase can work its way into monthly interest charges relatively quickly.
The same applies to many home-equity lines of credit and other variable-rate loans.
Auto loans and mortgages work differently. Their rates are influenced by broader bond markets, lender competition and expectations about future Fed policy, so a Fed pause does not automatically produce cheaper financing the following morning.
That is already visible in mortgages.
Long-term Treasury yields remain elevated even as expectations for a September Fed increase have fallen. Investors remain concerned about inflation, government borrowing and the amount of debt hitting the market, meaning consumers should not assume that a Fed pause will suddenly restore the low mortgage rates of several years ago.
In other words, “no hike” and “lower rates” are not the same thing.
The Fed itself remains divided.
At its July meeting, policymakers voted to keep rates unchanged at 3.50% to 3.75%, but three officials dissented and wanted a quarter-point increase. Several policymakers continue to argue that inflation remains too far above the central bank’s 2% target to declare victory.
Inflation is still running above target, and elevated energy costs have left policymakers with little room to become complacent.
That makes the next several economic reports unusually important.
The Fed will see another employment report and additional inflation data before its September meeting. A sudden rebound in hiring or renewed acceleration in prices could reopen the case for another increase.
But the burden of proof has changed.
Only weeks ago, the question was whether the Fed would need to raise rates again to control inflation. The emerging consensus among economists is now that the central bank may be able to sit still for the rest of the year and let its existing rate level do the work.
For consumers carrying debt, that does not make borrowing cheap.
It does mean the cost of borrowing may finally stop getting worse.
JBizNews Desk | Washington
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