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Whether you're planning to finance a vehicle purchase or want to tap into your home's equity with a home equity loan, the interest rates managed by the Federal Reserve could significantly impact how much you pay. Those rates might soon change.
On Tuesday, the Senate Banking Committee held a confirmation hearing for Federal Reserve nominee Kevin Warsh, President Trump's selection to replace current Chair Jerome Powell. A change in Federal Reserve leadership might impact the Federal Reserve's approach to regulating interest rates, and that could have wide-reaching implications for consumers' borrowing costs and savings rates.
Here's what to know about how changing interest rates could impact your life, and what might happen if Warsh assumes his new role as Chair.
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Understanding how the Federal Reserve regulates interest rates
The Fed manages a benchmark interest rate, and when that rate increases, short-term interest rates, like those on credit cards, also increase. At the same time, raising the rate may help cut inflation, and in turn, interest on mortgages tends to decrease.
The opposite is also true. If the Fed reduces the benchmark rate to encourage spending, inflation tends to increase. Both high interest rates and high inflation may have negative impacts on consumers and the economy, so the Fed works to carefully balance both factors with the benchmark interest rate.
How Trump wants the Fed to handle interest rates
Trump has repeatedly argued that Powell should have brought the benchmark interest rate down, noting that countries with lower interest rates had an economic advantage over the United States. Trump repeatedly threatened to fire Powell while also pressuring him to lower interest rates.
Trump also allegedly said that he wouldn't appoint a Fed Chair who wouldn't agree to lower interest rates. During his confirmation hearing, Warsh stated that Trump had not asked him to predetermine, commit, fix, or decide on interest rates, and that he would not agree to do so.
Warsh's approach to the central bank and politics
Warsh didn't seem ready to give in to Trump's pressure to lower interest rates, and he stressed the importance of keeping the central bank independent from politics.
"Monetary policymakers must act in the nation's interest ... their decisions the product of analytic rigor, meaningful deliberation, and unclouded decision-making," Warsh said. He explained that central bankers must be open to new ideas and able to listen to different views, plus they must focus on making decisions wisely.
Warsh's approach to regulating inflation
Warsh has a reputation of being "hawkish," meaning he's careful about cutting interest rates out of fear that doing so could cause inflation to get out of control. During the confirmation hearing, Warsh indicated that it's time for the Fed to adjust how it approaches inflation, noting that he disagrees with traditional models that view consumer spending and wage growth as being main inflation drivers.
He explained that he feels that factors like excessive government spending and growth in the money supply drive inflation more than factors like consumer spending. As a result, Warsh believes that to control inflation, the Fed needs to look more closely at the relationship between current fiscal policy and monetary supply, rather than primarily using interest rates to manage inflation and the economy.
Could Warsh lower interest rates
Based on Warsh's comments, he's cautious about cutting interest rates. Even if he decides to lower the benchmark interest rate, he might not be able to.
A 12-member Fed committee sets interest rates, and Warsh would need to get the committee on board with cutting rates. That could be difficult, since many committee members want to see inflation get closer to the target 2% before agreeing to cut rates.
Additionally, the current war with Iran has significantly increased gas prices, so cutting interest rates could be more challenging and complicated.
What higher interest rates mean for you
Under Warsh, the country might see higher interest rates for longer. Those interest rates mean that homebuyers have less borrowing power, since a mortgage interest rate of even half a percent higher could cause you to pay thousands of dollars more over the life of a 30-year mortgage. You might need to adjust your budget because of higher interest.
Higher interest rates benefit CD and savings account yields, and these accounts offer higher returns. With a higher interest rate, you might reach your savings goals sooner.
Retirees who hold bonds could be negatively impacted by the higher interest rates. Increases in interest rates cause the price of existing bonds to drop, so your total returns on your bonds could drop.
Bottom line
Warsh's confirmation isn't final, and North Carolina Senator Tom Tillis said that he wouldn't vote for Warsh until the Justice Department drops its investigation into Powell. At this point, a leadership change isn't guaranteed, so we can't know just what to expect in terms of interest rates and inflation in the future.
Navigating periods of high inflation could be tricky. Focusing on building up your savings may help you avoid going into debt, which may lower your financial stress during this challenging time.
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