Federal Reserve holding interest rates steady delays relief for consumers this summer

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Consumers who kept hoping that interest rates would edge down this summer better prepare for another rain delay.

The Federal Reserve – which held its last meetings June 17 and June 18 – declined to cut short-term rates. Some economists say the Fed might not even cut interest rates at its meeting in late July.

University of Michigan economic forecaster Daniil Manaenkov told the Detroit Free Press, part of the Paste BN Network, that the University of Michigan's forecast in May initially had expected the first rate cut to come at the Fed's July 29-July 30 meeting.

A month later, winds shifted along with economic conditions. The labor market added jobs at a respectable clip, he said. Inflation, while declining, eased at a slower pace.

"The timing of the first cut is likely to be delayed a bit. Perhaps till September," Manaenkov told the Detroit Free Press on June 12.

The authors of the forecast, who are part of the university's Research Seminar in Quantitative Economics, are Manaenkov, Jacob Burton, Gabriel Ehrlich, Kyle Henson, Michael McWilliams, Niaoniao You and Yinuo Zhang.

The university's forecasters continue to expect that a slowdown in the labor market will hit later in 2025. The expectation, Manaenkov said, is that the Fed will gradually cut interest rates twice before year-end.

The Fed has sat on the sidelines for months

It has been six months since the last time the Federal Reserve cut interest rates, leaving the federal funds at a 4.25% to 4.5% range.

If you're not shopping for a mortgage or a car loan, you have far less anxiety about an outlook for continued higher interest rates. Ditto for someone who hasn't built up a good deal of debt on credit cards.

But if you're in the market to borrow, you're not thrilled by what you're seeing.

The 30-year fixed rate mortgage remains high and averaged 6.84% as of June 12, according to data from Freddie Mac's latest primary mortgage market survey.

It's down slightly from an average of 7.04% in mid-January and down significantly from the 7.79% spike in late October 2023.

Mortgage rates aren't set by Fed action, but mortgage rates are influenced by the Fed's rate-cutting path, inflation expectations, yields on 10-year Treasury bonds and other factors.

When it comes to car loans, the national average interest rate being promoted by lenders is 7.24% for a 60-month new car loan and 7.64% for a 48-month used car loan, according to Bankrate.com data. Again, we're not talking about bargain rates.

A Fed rate cut could be welcomed by consumers

Many consumers remain anxious about what's next for their finances, as the Fed drags its feet when it comes to cutting interest rates in 2025.

"Consumers will definitely look for any kind of rate drop as a very positive signal. We saw that back in September last year when the Fed began its rate cut cycle through December," said Charlie Wise, senior vice president and head of global research and consulting at TransUnion.

Tariffs trigger price hikes: Shoes, clothing and toys to get more expensive this summer

Wise said some consumers saw the fact that the Fed was willing to lower interest rates three times in 2024 as a sign that, perhaps, the worst was over when it came to high prices and inflation.

The Fed's latest pause gives some consumers reason to pause, too, and wonder what's next.

Typically, Wise said, the Federal Reserve might be in the position to seriously consider cutting interest rates at its June policy meeting because inflation increased less than expected in May. The Consumer Price Index was up 2.4% year-over-year in May and rose only 0.1% on a month-to-month basis.

Right now, though, the picture remains muddy when it comes to prices in the months ahead. We don't know the level of tariffs that the United States might end up imposing on major trading partners and how tariffs will drive up consumer prices.

It's unknown how much tariffs will drive up prices

So far, consumers aren't seeing rapid price hikes overall due to higher tariffs. Businesses seem to be absorbing much of those costs early on, according to analysts. How long that lasts is anyone's guess.

President Donald Trump's tariff war isn't over. Trade deals are being negotiated. Yet, we've seen much volatility in how tariffs are being imposed so far. "They're on, they're off; they're up, they're down," Wise said.

The Fed wants to keep interest rates where they are, Wise said, until there's more clarity.

The Fed might cut rates at the earliest, he said, in September.

"The Fed is comfortable enough with the job situation that they want to sit pat and wait to see how will tariff negotiations shake out," Wise said.

Prices are likely to go up, say on autos, he said, based on tariffs but then level off. It's unknown, though, if higher prices ultimately drive down demand enough to drive prices back down.

"All very complicated," Wise said. "The Fed needs data to work on. They're very smart people. They don't work on hope. They work on data."

Oddly enough, many consumers have a positive outlook about their future finances, thanks to a continued strong jobs picture overall.

Many consumers remained optimistic – some 55% – about their household finances over the next 12 months, according to a new TransUnion Consumer Pulse survey. That's the same percentage as the same time last year but 3 percentage points lower than the first quarter of 2025.

The online survey of 2,998 adults was conducted May 1 through May 12 by TransUnion in partnership with third-party research provider Dynata.

The level of uncertainty about future costs has seen a marked increase since April, Wise said.

The TransUnion survey found that 27% of U.S. consumers are now pessimistic about their household finances over the next 12 months. That's a four-percentage point increase from the same time a year ago.

TransUnion noted that it's the highest level of pessimism since TransUnion first began tracking this data in early 2021.

"It wasn't surprising to see the level of pessimism increase," Wise said. "We continue to be a little surprised about the continued level of optimism."

Many consumers express a good deal of confidence about their household finances even as they express more concerns about the possibility of a recession.

The survey indicated that 87% of consumers reported concern about the impact of current or possible tariffs on their household finances and 41% said they were very concerned.

When it comes to their own finances, Wise said, consumers appear to be saying that they're confident that they can weather out the latest storm clouds.

A strong employment picture and sustained wage gains help shore up optimism, Wise said. The U.S. unemployment rate was 4.2% in May, which Wise said is a "very good employment situation."

Fed has signaled slow roll for rate cuts

At the Fed's last meeting in 2024, policymakers gave some clues that the Fed could possibly initiate two more interest rate cuts in 2025 – instead of the four rate cuts projected earlier. At the March meeting, the Fed signaled two quarter-percentage-point rate cuts in 2025.

If we saw two quarter-point rate cuts, the federal funds rate could land in the 3.75% to 4% range by the end of December.

The short-term federal funds rate is used for overnight loans among banks, but it plays a huge role in influencing many interest rates that consumers and businesses pay to borrow throughout the economy, including credit card rates.

Why is the Fed throwing ice on the rate-cutting party?

Economists agree on these two words: tariffs and inflation.

"Fed officials are still grappling with what the global trade war means for inflation and growth, and will keep policy on hold until they gain some clarity and the tariffs and their fallout," said Mark Zandi, chief economist of Moody’s Analytics.

Zandi also anticipates that the Fed's next rate cut could come at the Sept. 16 and Sept. 17 meeting. Or, he said, "December at latest."

By then, he said, Federal Reserve policy leaders will have enough evidence that the trade war is doing more damage to growth. It also is likely, Zandi said, that there will be more signs that the current increase in inflation is more temporary.

He expects the Fed will cut rates by a quarter-point each time this year and into next year until the federal funds rate reaches 3%, where policy is neither supporting nor restraining growth.

Zandi expects longer-term interest rates, including mortgage and auto loan rates, to remain roughly where they are through this time next year.

"Of course, interest rates are highly volatile, but on average over the next year, fixed mortgage rates should be near 7%," Zandi said.

The new TransUnion survey did note an uptick in fears about a potential recession where 52% say it was in their top three financial concerns over the next 12 months – its highest level in two years.

Many consumers and economists thought a recession was on the horizon for 2023 but one never hit.

Now, recession worries are building once again, as some consumers fear the prospects of higher prices and continued high interest rates.

"Recession odds remain uncomfortably high, with the probability of a recession starting at some point in the coming year at 45%," Zandi said.

"Once the higher tariffs translate into higher prices for imported goods, cutting into consumers’ purchasing power, the economy will struggle even more," Zandi said.

Later this year, Zandi said, the economy will be "vulnerable to anything that doesn’t stick to script, and there are many threats."

University of Michigan forecasters put the odds of a recession at 30% over the next 12 months.

We're dealing with a lot of chatter on what's next, but the reality is that we're dealing with plenty of unknowns, too many unknowns apparently for the Fed to make a move this summer.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.