“The last several months where we did see material progress on inflation, we had the tailwind of falling gasoline and oil prices,” McBride says. “We don’t have that now, and lo and behold, the trend on inflation is different.”

Fed officials may tweak their balance sheet policy, a lesser-known tool that still finds its way to consumers’ wallets

Separate from the Fed’s interest rate policy is an expected upcoming announcement on how the U.S. central bank plans to continue adjusting the amount of cash circulating in the banking system. It’s a confusing, yet consequential, decision for consumers because it could ultimately be another lever that impacts the borrowing costs they pay — especially if something goes wrong.

Since September 2022, the Fed has been letting up to $60 billion in Treasury securities and $35 billion in mortgage-backed securities roll off its balance sheet at maturity. The Fed purchased those assets in the wake of the coronavirus pandemic, a form of “unconventional” monetary policy that effectively increased the money supply.

The Fed grows its balance sheet to stimulate demand and weigh on longer-term interest rates, such as the 30-year fixed-rate mortgage. But the same is true vice-versa. By letting assets roll off, Fed officials are effectively weighing on the availability of credit in the economy.

What is the Fed’s balance sheet?

Find out more about this behind-the-scenes Fed policy move that has major implications for your wallet.

Fed officials, however, don’t want to take the process too far. While normalizing their balance sheet after the financial crisis, officials back in 2019 lost control of a key interest rate that’s supposed to stay within the Fed’s desired target range for the federal funds rate. Known as the repurchase, or “repo,” rate, it surged as high as 9% during one trading day, despite the federal funds rate at the time holding in a target range of 2%-2.25%, an analysis from the Richmond Fed found.

The repo market is often seen as the “beating heart” of financial markets. Trouble in that corner of the financial system can reverberate across the entire U.S. economy, making it harder — and temporarily more expensive — to access credit.

Today, officials acknowledge that shrinking their balance sheet too much likely contributed to the dysfunction. Back then, officials had taken roughly $700 billion out of the system. Today, however, they’ve vacuumed up even more — almost $1.6 trillion.

“There can be times when, in the aggregate, reserves are ample or even abundant, but not in every part. And those parts where they’re not ample, there can be stress,” Powell said at the Fed’s March post-meeting press conference, alluding to that turmoil five years ago. “That can cause you to prematurely stop the process to avoid the stress. And then it would be very hard to restart.”

Powell revealed at the Fed’s March meeting that it’ll soon be time for officials to discuss the next phase for their balance sheet policy. On deck is an announcement about when “tapering” could start and by how much.

What the Fed’s next announcement means for you

The Fed’s plans to keep interest rates higher for longer means it’s an important time for consumers to prioritize devising a plan for paying off any high-interest debt and building up an emergency fund so they’re well-prepared for any unexpected expense.

—A significant accelerator for your debt repayment plan are balance-transfer cards, which currently offer up to a 0% introductory annual percentage rate (APR) for around 21 months, according to Bankrate’s latest findings.

—Higher for longer interest rates mean banks are still offering the best returns on consumers’ deposits in over a decade. The top-yielding online bank is currently offering a 5.35% annual percentage yield (APY), Bankrate’s latest rankings show. An added bonus of a high yield is that it can help you grow the funds you use for unexpected expenses or longer-team goals even quicker. At these current levels, a 5.35% APY could generate $535 in interest in one year on a $10,000 deposit.

—Customers still have the opportunity to lock in those higher yields for the long term through a certificate of deposit (CD). Yields on 5- and 1-year CDs were falling fast as it looked like the Fed was about to cut interest rates. They’ve now since stabilized, and most important for consumers, are continuing to top inflation. The best 1-year CD can lock in a 5.36% APY, while 5-year CDs are currently paying a top yield of 4.55%. If you’re fine with locking away the funds, those yields could help make sure you’re still earning a decade-smashing yield, even if rates do eventually begin to drift lower.

“Paying down debt is going to be the quickest way to give yourself relief from the cost of interest,” McBride says. “From the savings side, let the good times roll.”

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