Fed Rate Cuts Still Likely, but ‘It’s Going to Be a Bumpy Ride’

If the Federal Reserve is feeling the heat from anxious borrowers and an eager stock market, it isn’t showing. The Fed decided to hold interest rates steady at a target range of 5.25% to 5.50% for the fifth straight time, but still predicted three rate cuts this year at its March Federal Open Market Committee meeting on Wednesday.

Following the announcement, Chair Jerome Powell said the Fed still expects to make rate cuts “at some point this year,” echoing his testimony before Congress earlier this month. He noted that inflation has eased substantially but is still too high, and the Fed will need to adjust meeting by meeting as it monitors inflation.

“It’s going to be a bumpy ride,” he said.

The Fed put a pause on interest rate increases in July 2023 amid Consumer Price Index data showing that inflation fell to 3% year-over-year in June. But inflation has yet to drop below 3%, while the central bank’s goal is 2%.

The Fed indicated that potential rate cuts are still likely in the latter half of 2024, but Powell emphasized that the Fed wants to see “continuing evidence” of inflation easing. With just one CPI report scheduled to be released between now and the next scheduled meeting on April 30 to May 1, it seems likely the Fed will need more time to decide if a downward inflationary trend is continuing.

Considering the Fed was blamed for acting too slowly to curb soaring inflation starting in 2021, it’s not a surprise that it wants to be sure the specter of inflation has been exorcized.

“It’s not worth the risk of stoking inflation again to cut rates for an economy that doesn’t need lower rates,” said Gregory Heym, chief economist at real estate service company Brown Harris Stevens.

So far the economy appears to be approaching a “soft landing,” with the Fed raising interest rates enough to combat inflation without sending the economy into a recession. But leaving high interest rates in place for too long could create a drag on the economy as employers pull back on hiring and consumers stop spending.

The continued wait for the Fed’s next move raises a number of questions. How much longer can consumers put off buying cars or homes as they wait out higher interest rates? Will those paying off credit card debt get any relief on interest before the end of the year? Should savers lock in higher rates before the bottom falls out on CDs and high-yield savings accounts?

Stay tuned.

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What did the Fed do about interest rates?

The Federal Reserve announced it’s leaving the federal funds rate unchanged at its March meeting. That keeps the rate at 5.25% to 5.50% until at least its next meeting on April 30, if not longer. 

Under pressure to keep inflation in check and maintain economic growth, the Fed is tasked with striking the right balance. No one wants permanently high prices, but no one wants endless interest rate hikes either, which have been punishing for borrowers and debt holders. 

Powell said that the Fed wants to avoid a repeat of the 1980s. The Fed reduced rates in 1986 after inflation initially declined but escalated again the following year, forcing the Fed to reverse course and raise rates again.

To tame inflation, the central bank has carried out a series of rate increases since early 2022. The Fed took a breather from its aggressive rate-hike policy starting in July and indicated at its December meeting that multiple cuts could be coming in 2024. But the Fed’s ultimate goal is to bring inflation down to 2%, and February’s inflation data still showed consumer prices growing by 3.2% year over year.

The Fed’s monetary policy has a strong influence over financial markets -- and a direct impact on your wallet. Here’s how high rates could affect your financial goals heading into the new year.

What’s next for the Fed in 2024?

Many experts expect the Fed will begin dropping rates in the second half of 2024, so long as inflationary pressures continue to ease.

“The Fed won’t cut rates until inflation trends closer to the 2% mark, and we’re still sitting at nearly double that target -- but it’s not all bad,” said Frank Lietke, executive director and president at Ally Invest Securities. He noted that waiting to lower rates can help avoid a return of inflation and that higher interest rates are helpful for savers.

The Fed ended its last meeting in 2023 predicting multiple rate cuts in 2024, but inflation hovered above expert expectations in January and February. However, Powell noted that while both months were higher than expected, “they haven’t changed the overall story.”

That doesn’t mean rate hikes are off the table entirely, though. The Fed has built room for economic uncertainty into its plan.

Overall, it’s unlikely we’ll see relief from high interest rates any time soon. That means you can expect borrowing to remain high, while savings rates will also stay elevated.

Mortgage rates may see relief before the end of the year

Average mortgage rates have been declining slowly since reaching nearly 8% last October. And if Fed rate cuts are on the horizon, that could spell good news for prospective homeowners.

Although the Federal Reserve doesn’t directly set mortgage rates, they are affected by the central bank’s decisions. Until the Fed signals it plans to start lowering rates -- a move that likely won’t happen until later in 2024 -- experts don’t expect mortgage rates to cool. And even then, it can take months for rates to see significant declines, and are unlikely to drop to pandemic lows. 

“No matter what the Fed does, mortgage rates are not going back to where they were,” Heym said. “They were record lows, hitting a once-in-a-century mark. Rates will come down, but they’re not going to go back to where they were anytime soon.”

Consider a home below your budget to account for higher interest. More importantly, take a look at your debt-to-income ratio and credit score, which can directly affect the mortgage rate offered to you by a lender. 

Carrying credit card debt will remain expensive in 2024

Just like mortgage rates, credit card interest rates will also remain high. The average credit card interest rate is 20.75% as of March 13, according to CNET’s sister site Bankrate. The rate has remained the nearly same since October, but some issuers have even higher rates. As long as the federal funds rate remains high, banks are likely to keep credit card annual percentage rates high for borrowers. When APRs are high, you’ll pay more in interest and potential late or penalty fees if your card has a balance.

If you’re carrying high-interest credit card debt, aim to pay down your balance quickly to avoid interest from pushing you further into debt. Explore strategies for paying off credit card debt, such as using a balance transfer card, debt consolidation loan or cutting expenses temporarily to put more toward paying off the balance.

If you currently have a high rate on loans or other accounts, you may be able to refinance your debt at a lower rate later in the year.

Expect savings and CD rates to stay competitive

If you’re setting aside money for savings goals, you can earn high interest on your savings right now. Some high-yield savings accounts we track offer APYs above 5%. Many of the best CDs offer rates between 4% and 5% APY.

Since the beginning of the year, interest rates for these low-risk savings accounts have edged down slightly. However, experts believe that rates will remain high until the Fed starts dropping the federal funds rate.

Locking in a long-term CD, like a three– or five-year option, lets you earn a fixed interest rate on your savings, so even if rates drop as expected, your rate will remain the same. If you want to keep your savings more flexible, short-term CDs and high-yield savings accounts currently offer higher rates than most long-term CDs.