Americans are paying the price for the Federal Reserve’s flurry of rate hikes, designed to combat the hottest inflation in 40 years through sharply higher borrowing costs. But with inflation now slowing, the Fed’s rate hikes may be coming to an end, and that has important implications for your economy, according to economists.
The Federal Reserve said Wednesday, the central bank’s third break in a row. Wall Street now predicts that the Fed will stand pat in early 2024 due to cooling inflation and a slower labor market. After that, the Fed could start cutting interest rates as early as early 2024, some economists now predict.
To be sure, Fed Chairman Jerome Powell is keeping mum on the bank’s next move. saying earlier this month that it is too early to declare victory over inflation or to discuss when it might start cutting interest rates. But he also noted that consumer prices, excluding volatile food and energy costs, rose just 2.5% annually in the past six months — not far above the Fed’s 2% inflation target.
“They have finished [hiking rates] for months — they just don’t want the markets to know,” Jamie Cox, managing partner of Harris Financial Group, told CBS MoneyWatch. “Right now, with the way the Fed has been able to communicate with the markets on, it says. , ‘We won’t raise interest rates, but don’t think for a second we won’t’.”
Inflation has slowed rapidly, with the consumer price index, a basket of goods and services typically purchased by consumers,in November, down from a 40-year high of 9.1% in June 2022, according to FactSet.
Interest rate cuts in 2024?
Economists predict that the rate hikes of the past two years are now likely to be a thing of the past, although the Fed is not telegraphing that. The Fed’s last rate hike was in July, when it increased the federal funds rate to 5.25% from 5.5%.
“We have emphasized for some time that the Fed is done hiking, but it has taken until now for that to crystallize among a broad range of policymakers,” Morgan Stanley economists said in a recent research note, adding that they predicts that the bank will hold interest rates. stable until it makes its first rate cut in June 2024.
The central bank is expected to hold its benchmark interest rate steady at the Dec. 13 meeting as well as at the Jan. 31 meeting, according to economists polled by FactSet. But the central bank could start cutting interest rates as early as March, according to a growing number of Wall Street analysts.
It can have an impact on your money, from your savings to buying a home. Here’s what the experts say.
What a break means for CDs and savings accounts
Savers have enjoyed the bright side of the Fed’s rate hikes through high-interest savings accounts that can now carry annual percentage returns of 5% or more. That will come laterthat effectively paid little to next to nothing for savers.
Likewise, certificates of deposit (CDs) now offer robust rates, making them a more attractive place to buy some money. But with the Fed expected to hold rates steady for several months and then begin cutting in 2024, now is the time to lock in some of those juicy rates, experts say.
That’s especially rewarding for people who were “recipients of terrible interest rates” prior to the Fed’s rate hikes, notes Jamie Cox, managing partner of Harris Financial Group.
“The risk now is that interest rates will come down on you,” Cox added, noting that he recommends investors pull money into some longer-term CDs before that happens.
For example, some banks offer CDs that pay APYs of close to 5% for up to 5 years — a rate that may be difficult to achieve once the Fed starts cutting. Likewise, if you haven’t put your savings into a high-yield savings account, now is the time to do so and take advantage of rates topping 5%.
Mortgage interest rates 2024: Will they come down?
Mortgage rates have already fallen from their 20-year highs earlier this year, when
A break from the Fed could help bring mortgage rates even lower, LendingTree senior economist Jacob Channel said in an email.
“[T]heir skipping an increase in December could continue to relieve some of the upward pressure on mortgage rates,” Channel noted. “For the rest of December, rates could fall below 7%, providing even more savings over , where they were just a few weeks. since.”
See more about mortgage interest from Managing Your Money:
According to HousingWiremost real estate experts believe mortgage rates will range from 7% to 7.6% in the first part of the year and slide into 6% territory by the end of 2024.
Even if mortgage rates fall below 7%, that will remain well above their January 2022 level of 3.2%, HousingWire notes. And buying a home would remain relatively expensive as housing prices are around 40% higher than before the pandemic.
The question is whether slightly lower mortgage rates could convince some homeowners to list their properties, given that many bought or refinanced their homes during the pandemic when interest rates were around 3%. This has meant that many are not willing to waive their existing loan in order to take out a new mortgage at a higher interest rate.
Could credit card companies cut APRs?
Don’t count on it, said LendingTree credit analyst Matt Schulz.
“Things are probably going to get a little bit worse for those with credit card debt before they get better,” he noted. “Card rates certainly won’t rise as sharply as they have over the past 18 months, but they’re likely to continue trending higher for at least a little while longer.”
That’s why experts recommend that consumers pay off any balances, which can be expensive to carry on a credit card, even in the best of times. But now the average APR on a new credit card is 24.56%, the highest since LendingTree began tracking it in 2019, Schulz noted.
Someone with $5,000 in credit card debt at a 24.56% interest rate will pay $1,497 in interest and take 26 months to pay off the balance if they make $250 monthly payments, he added.
Many Americans have used the savings they built up during the pandemic, as the United States provided stimulus checks and generous unemployment benefits to help households weather the crisis. But the economy is slowing, which could weaken the labor market and lead to layoffs, noted Cox of Harris Financial Group.
“A lot of people need to build back their savings,” Cox noted. “Now that everyone is working, they’re not particularly worried if their savings accounts are depleted.”
But, he added, that assumes a slowing economy won’t affect their jobs. “People have to make sure they squirrel away money” for the rainy scenario, he noted.