What the Fed’s Pause Means for Consumers and the Economy

The Federal Reserve announced this week that it will hold interest rates steady, keeping its benchmark federal funds rate unchanged. Policymakers’ commitment to their wait-and-see stance reflects a mix of caution, uncertainty, and a raft of data that has sent competing economic signals recently.

Fed Chair Jerome Powell described the central bank as being in a strong position to respond to whatever comes next, while also admitting that they aren’t entirely sure what that will be. “We haven’t been through a situation like this,” Powell said. “We have to be humble about our ability to forecast it.”

So what’s going on beneath the surface?

Why the Fed Is Holding Back

The decision to pause rate changes comes amid new variables, most notably the impact of the White House’s tariff policies. These tariffs are expected to push prices higher over the coming months, complicating the Fed’s efforts to fully tame inflation after a multi-year campaign of rate hikes.

While inflation has cooled from its peak, policymakers aren’t convinced the job is done, especially with trade policies likely to add new price pressures. On top of that, Powell and his team are parsing mixed signals from the broader economy: unemployment remains historically low at 4.2%, but cracks may be forming.

What It Means for Consumers

The only interest rate that Fed policymakers set is the federal funds rate, which is the rate banks charge each other for overnight loans. It then acts as a benchmark that ripples through nearly every aspect of consumer finance.

Since the Fed hiked rates in 2022 and 2023, borrowing has gotten more expensive across the board. Although the Fed lowered rates a few times in 2024, the effects have been modest. By holding rates steady now, those elevated costs are likely to persist.

Credit Cards:
The average credit card interest rate is still over 20%, close to historic highs. Most cards have variable rates which are tied closely to the Fed's benchmark, so any future cuts could eventually offer some relief to credit card users who carry a balance, but not yet.

Auto Loans:
Borrowing to buy a car remains expensive. New car loans average around 7.3%, and used car loans are pushing 11%. Combined with rising vehicle prices, which have also been exacerbated by tariffs, affordability is becoming a real challenge. Roughly one in five households with car loans now pays more than $1,000 per month.

Mortgages:
Mortgage rates aren’t directly set by the Fed, but they tend to move with expectations about inflation and economic stability. Right now, uncertainty about trade policy and long-term costs has kept rates stuck in a narrow, elevated range. A 30-year fixed mortgage is hovering around 6.9%.

Student Loans:
Federal student loan rates are fixed once a year and aren’t directly impacted by Fed moves in the short term. But borrowers are facing tighter budgets overall, and fewer options for relief or forgiveness than in previous years.

Savings:
The upside to higher rates is that savers continue to benefit, somewhat. Yields on high-yield savings accounts and CDs are still well above pre-pandemic levels, but they’ve come down from recent highs. Still, for most households, the benefit of earning an extra percent or two on savings doesn’t fully offset the sting of more expensive borrowing.

What It Could Mean for the Economy

The bigger question is how long consumers can keep spending with credit this expensive.

Retail sales dipped last month. The labor market is cooling. Job openings are down, and hiring has slowed, even as overall unemployment stays low. Consumer sentiment has been choppy. All of this points to the possibility that households may be beginning to pull back.

If that continues, it could weigh on economic growth. Consumer spending drives about two-thirds of U.S. GDP, so any meaningful slowdown has ripple effects.

For now, the Fed is standing still, neither raising rates to fight inflation nor cutting them to stimulate growth. It's a sign that policymakers are trying to give the economy time to stabilize while keeping options open in case things change quickly. Whether that strategy will work depends largely on what consumers do next.