This month marks the one-year anniversary of the Federal Reserve’s last interest rate hike, which took rates to their highest level in 23 years. Now, as inflation continues to slow, economists are making predictions about when the central bank will start cutting rates.
The Fed is scheduled to meet on July 30-31. Chairman Jerome Powell is expected to discuss the bank’s rate decision at 2:30 p.m. on Wednesday. After this week’s session, the Fed will discuss its benchmark federal funds rate again at its meeting on September 17-18.
Wednesday’s announcement is expected to offer a mixed bag of solutions for consumers and businesses grappling with the highest borrowing costs in years, experts say.
First, economists say the Fed is unlikely to announce a rate cut this week because Powell has indicated he wants to see more evidence Inflation is closer to the central bank’s target of 2% a year before it begins cutting. But Powell is also expected to provide some insight into when the bank will begin cutting rates, with about 9 in 10 economists expecting the September meeting to mark the Fed’s first rate cut since 2020, according to financial data firm FactSet.
“The case for a cut is already strong, and the Fed will likely use the July meeting to plant the seed that a September cut is on the table,” predicted Ryan Sweet, chief U.S. economist at Oxford Economics, in a research report released Friday.
Markets are still betting on more than one rate cut in 2024, even though Fed officials signaled earlier this year Only one rate cut is expected later in the year. But with inflation easing faster than expected in June, futures markets have priced in a 64% chance that the Fed will cut rates three times this year — in September, November and December, according to CME FedWatch.
What is the current Fed interest rate?
The federal funds rate, the rate banks charge each other for short-term loans, is now in a range of 5.25% to 5.5%. Most economists surveyed by FactSet expect the Fed to leave the rate unchanged until its September meeting.
The Fed last raised rates in July 2023, when the benchmark rate was cut to its current level. Starting in early 2022, the central bank raised interest rates to combat the highest inflation in 40 years, which peaked at 9.1% in June 2022. Since then, inflation has fallen to about 3% on an annual basis.
How much could interest rates be cut in 2024?
That will depend on economic trends over the coming weeks and months, with the Fed watching a range of data points, from inflation to the monthly jobs report.
Economists expect the Fed to cut rates by 0.25 percentage points in September, which would bring the benchmark rate to a range of 5% to 5.25%.
“For now, a modest 25 basis point cut in September seems likely. If that goes well, we could even see two more 25 basis point cuts before the end of 2024,” Jacob Channel, chief economist at LendingTree, said in an email. “Cuts are far from guaranteed, though. Remember, the Fed is designed to pivot quickly if something unexpected happens.”
Just over half of economists expect the benchmark rate to be cut to a range of 4.5% to 4.75% by December, according to FactSet.
What is the Fed’s rate decision based on?
The Fed has a dual policy objective, also called a dual mandate: to maintain price stability and ensure maximum employment.
Inflation continues to slow, reflecting the fact that prices for goods and services have been rising at a progressively slower pace since their 2022 peak. At the same time, the Fed is keeping a close eye on employment data. Since rate hikes are aimed at slowing the economy and taming inflation, they can also hurt hiring.
There are signs that the labor market is calming, as the Fed hopes. Job growth has averaged 177,000 a month over the past three months, a solid but unspectacular number, compared with an average of 275,000 a year ago.
Powell and other Fed officials have stressed that they are paying almost as much attention to the threat posed by a slowdown in hiring as they are to inflationary pressures. The Fed’s shift in focus from ensuring the jobs market doesn’t weaken too much likely reinforced market expectations for a rate cut.
“Job growth is slowing, and as Chairman Powell has stressed repeatedly over the past month, further slowdown in the labor market would be undesirable,” Goldman Sachs economist David Mericle said in a report. “But reducing payrolls sooner rather than later could help ensure” the strength of the labor market.
What would a rate cut mean for your money?
Borrowers could see some relief in the coming months, experts say. Mortgage rates have already fallen to just under 6.8% today, after reaching 7.2% in May.
“At first glance, a 0.44 percentage point decrease may not seem like a big deal. But in the mortgage world, a 44 basis point decrease is not something to be taken lightly,” because it saves about $100 a month on payments for buyers of a $350,000 home, Channel noted.
Rates could trend toward 2024 lows, ending the year closer to 6% for a 30-year fixed mortgage, he predicted.
Credit card companies could cut their annual interest rates in response to the Fed’s rate cuts, said Matt Schulz, a credit analyst at LendingTree. The average interest rate on a new credit card is now 24.84%, the highest it’s been since LendingTree began tracking rates in 2019.
“If the Fed cuts rates by a quarter-point, bringing the APR down to 24.59%, you’ll save $21 and take one month less to pay off your loan,” he said. “That’s not nothing, but it’s a lot less than you could save with a 0% balance transfer credit card.”
—The Associated Press contributed to this report