The Federal Reserve has left its key interest rate unchanged for its fourth-straight meeting.
The upshot for consumers: The cost to borrow money — whether through credit cards, for auto loans or mortgages — won’t be changing substantially anytime soon.
The Federal Reserve sets the benchmark interest rate for all other borrowing rates in the U.S. economy. This is known as the federal funds rate.
Right now, the federal funds rate target sits at between 4.25% and 4.5%. To be sure, the Fed does not directly control interest rates for consumer borrowing, but the federal funds rate serves as a type of baseline for the way banks set their own interest rates for customers seeking credit and loans.
It’s why the average credit card annual percentage rate (APR) has been stuck at about 25% for as long as the Fed has been holding its key rate at the current levels — about six months.
So why has the Fed been keeping interest rates at this level for so long?
The central bank is tasked by Congress with keeping both unemployment and the pace of price growth, or inflation, in check. To do so, it uses the federal funds rate to control demand for goods and services in the economy — much of which rely on borrowing.
When the Fed fears businesses have been too aggressive in raising prices in response to strong demand, it raises the cost of borrowing to cool that demand down. It’s what happened when the Fed hiked interest rates to the highest levels in more than a decade in 2023 in response to surging price growth as the economy roared back to life from the pandemic.
Since then, inflation has cooled substantially. So much so, in fact, that President Donald Trump has begun to pester the Fed about cutting the federal funds rate.
Yet the Fed’s preferred gauge of inflation remains above its 2% target and, its policymakers say, risks moving higher because of Trump’s tariffs. Fed Chair Jerome Powell said Wednesday that he expects the cost of most tariffs to ultimately be passed through to consumers in the form of higher prices.
There are risks to keeping rates elevated, however. Reducing overall demand in the economy makes companies less inclined to hire workers. Already, there are signs that the labor market is weakening, though there remains debate about just how much at this moment.
“If you’re out of work, it’s hard to find a job, but there are very few people who are being laid off at this point,” Powell said Wednesday. “So that’s an equilibrium we watch very, very carefully.”
But overall, he said, “it’s a pretty good labor market.”
For now, analysts say the Fed remains in wait-and-see mode. Officially, the Fed estimates that it may cut the interest rate two times by the end of this year.
Powell said he anticipates learning more about the impact from tariffs this summer. But he also said there is not a lot of “conviction” among Fed policymakers about where things could go.
“The U.S. has defied all kinds of forecasts for it to weaken,” Powell said Wednesday, referring to the economy, adding that “eventually it will — but we don’t see signs of it now.”