The Federal Reserve is widely expected to leave interest rates unchanged at its July policy meeting, a move that would keep borrowing costs elevated for millions of Americans even as inflation has shown signs of easing.
According to the CME Group's FedWatch tool, investors overwhelmingly expect the Federal Reserve to keep its benchmark interest rate unchanged this week, with many now looking to September as the earliest opportunity for a potential policy shift.
The decision will come as Federal Reserve Chair Kevin Warsh continues balancing progress on inflation against new risks stemming from higher energy costs and geopolitical uncertainty.
The consumer price index, a broad measure of inflation, unexpectedly declined in June, bringing the annual inflation rate down to 3.5%. However, that encouraging report was quickly overshadowed by a jump in crude oil prices following escalating tensions in the Middle East, raising concerns that inflationary pressures could return.
Economists say those developments make it difficult for the central bank to begin lowering interest rates, despite increasing political pressure from President Donald Trump, who has repeatedly urged the Fed to reduce borrowing costs to stimulate economic growth.
"It sets up a potential conflict between Trump and the Fed, where his desire for lower interest rates is unlikely to be realized anytime soon," Brett House, an economics professor at Columbia Business School, told CNBC.
Although many consumers closely follow the Federal Reserve's decisions, the benchmark federal funds rate does not directly determine the interest rates Americans pay. Instead, it serves as the foundation for borrowing costs throughout the financial system, influencing everything from credit cards and personal loans to mortgages and savings accounts.
When the Fed raises or maintains higher rates, borrowing generally becomes more expensive, helping slow consumer spending and curb inflation. Lower rates, by contrast, encourage borrowing and investment but can also contribute to rising prices.
House noted that consumers should remember that the bond market also plays a significant role in determining borrowing costs. "Consumers need to remember that the rates that they face are not set only by the Fed. The bond market has a big hand in determining the rates consumers pay," he said.
That dynamic has become particularly important in recent weeks. The yield on the benchmark 10-year Treasury note, which heavily influences mortgage rates and other long-term loans, has risen alongside oil prices and geopolitical concerns. As a result, borrowing costs have remained stubbornly high even as inflation has moderated.
For prospective homebuyers, that means little immediate relief. Fixed mortgage rates generally track Treasury yields rather than the federal funds rate itself. Jeff DerGurahian, LoanDepot's chief investment officer and head economist, said mortgage rates remain elevated because improving inflation data has been offset by concerns over energy markets and geopolitical risks.
"Mortgage rates are holding just above 6.50%, as encouraging inflation data is being offset by higher oil prices and renewed tensions between the U.S. and Iran," DerGurahian told CNBC.
Consumers carrying credit card balances are also unlikely to see much improvement. Most credit cards have variable interest rates that closely follow changes in the Fed's benchmark rate. Since policymakers are expected to leave rates unchanged, annual percentage rates are expected to remain near historic highs.
According to LendingTree, the average interest rate on a new credit card offer currently stands at 23.79%. "The average has been remarkably stable, remaining unchanged in three of the past four months," LendingTree chief credit analyst Matt Schulz said.
Auto loans remain expensive as well. While financing costs depend on several factors beyond the Fed's actions, elevated interest rates have forced many buyers to take out larger loans with longer repayment terms to make monthly payments more affordable, according to Edmunds.
Federal student loans offer a mixed picture. Existing borrowers with fixed-rate federal loans will see no changes, but students taking out new loans will likely face higher interest rates because those rates are tied to Treasury yields established earlier this year.
There is one bright spot for consumers. Higher interest rates continue to benefit savers, allowing banks to offer relatively attractive returns on high-yield savings accounts and certificates of deposit. While savings rates have eased from the peaks reached during the Fed's aggressive tightening campaign, they remain well above historical averages.
"It's still a good time to save," Schulz said. "CD and high-yield savings account rates are down from their peaks seen a few years ago, but they're still strong by historical standards and are likely to remain that way for a while."
