After keeping its benchmark interest rate unchanged last week, Federal Reserve Chairman Kevin Warsh said the central bank plans to reduce the number of scheduled rate-setting votes over the next two years. Some economists warn that the change could delay relief for consumers if borrowing costs remain high.
The Fed will continue meeting eight times a year, but one meeting next year will not include a rate vote or a post-meeting statement. The number of meetings focused on strategy will rise to two the following year, leaving six scheduled opportunities to change rates, apart from emergency meetings.
The central bank voted on Oct. 28 to maintain its benchmark target range at 3.75% to 4%, as inflation remained above the Fed’s 2% objective. James Vrachas, executive director at Post Oak Group, said fewer meetings could mean consumers wait longer for borrowing costs to fall when rates are elevated.
Federal Reserve decisions influence several consumer products. Credit card rates, mortgages and auto loans can all be affected by changes in the central bank’s benchmark rate. Most credit cards have variable rates linked to the prime rate, which generally moves with the Fed’s benchmark.
Credit card rates have continued edging higher even while the Fed holds rates steady, according to LendingTree. Matt Schulz, the company’s chief credit analyst, said issuers are trying to limit their exposure to borrowers who could fall behind or default while everyday inflation remains persistent. He added that card issuers typically make significant rate reductions only when pressured by the Fed.
Jordan Ricciardi, a senior wealth strategy associate at UBS, said fewer scheduled opportunities to adjust rates could create longer periods of uncertainty for people buying homes, refinancing mortgages or financing businesses. Borrowing rates could remain high even if economic conditions begin to improve, Vrachas said.
Financial institutions can still change rates whenever market conditions warrant, regardless of the Fed’s meeting schedule. However, consumers may continue facing elevated costs for mortgages, car loans and credit card debt. Vrachas said the larger concern is whether lenders pass on lower borrowing costs as quickly as they pass on increases.
Economists also expect consumers to receive less guidance about the Fed’s future decisions as Warsh limits so-called forward guidance. Mark Hamrick, an economic analyst and founder of The Hamrick Brief, said Warsh has provided less indication of his intentions than some recent predecessors.
Hamrick said fewer votes alone would not necessarily change market rates, but the public could have fewer opportunities to hear directly how and why the Fed is making decisions that affect borrowing costs and savings returns. He advised consumers to compare offers, particularly when looking for high-yield savings accounts and certificates of deposit.
Bankrate data shows that some top-yielding online savings accounts are offering rates of 4% or more while the Fed holds its benchmark steady. Hamrick described those higher returns as one benefit for savers in an elevated-rate environment.
Sources: CNBC Markets.