After two years of rapid interest rate hikes, which sent mortgage and credit card rates soaring, investors and consumers are wondering when the Federal Reserve is planning to lower interest rates. In short, the Fed is looking for more positive signs from the economy, but rate cuts will likely happen in 2024. Read on to learn how soon this might happen.
Inflation and the Fed
In March 2022, the Federal Reserve initiated a series of rate hikes as a strategic measure to combat soaring inflation rates, a traditionally effective method used to curb consumer spending and mitigate price surges. Since then, the central bank has executed 11 rate hikes, which have significantly reduced the annual inflation rate to 3.1% in January, down from its peak of 9.1% in June 2022. However, January’s figure was higher than economists’ projections – and persists above the Fed’s target of lowering inflation to 2%. Given January’s hot inflation data, deep rate cuts aren’t likely to happen soon.
When to Expect the First Cut
Because January’s number was higher than previously forecasted, economists are now projecting the Fed’s first cut will happen farther along in 2024 than they had earlier estimated. This means the Fed’s next meeting in March is unlikely to result in cuts, and some are saying the May meeting may even be too soon. Instead, most economists aren’t expecting the first rate cut until the Fed’s June 12 meeting.
What Does This Mean for Americans?
Borrowers likely won’t see changes to loan terms anytime soon. Credit card rates, auto loans, and other credit products that are based on the Fed’s benchmark rate will likely stay steady at or near their current levels until the first rate cut.
Mortgages are slightly different. When inflation growth is worse than expected, mortgage rates tend to increase. Therefore, we might see a rise in mortgage rates in the upcoming weeks, but ultimately stabilizing around 6% by year’s end.
What to Do with Your Money in the Meantime
Here are some steps you can take with your money while you wait for rates to drop.
Open a Certificate of Deposit
When the Federal Reserve reduces rates, annual percentage yields (APY) on savings accounts also decrease. However, interest rates on certificates of deposit (CDs) remain unchanged once the account is opened, ensuring a fixed rate regardless of any fluctuations in APYs.
Strengthen Your Credit Score
If you’ve been holding out for lower rates before applying for a mortgage or personal loan, it’s time to prepare. Lenders heavily weigh your credit score in the approval process to determine the interest rate you’ll receive. While a credit score of 620 is the starting point for a conventional mortgage, aiming for a score of at least 750 can help you qualify for the most favorable rates.
To be sure your credit score is primed for the best rates, make on-time payments of credit cards and loans in full; request higher credit limits in order to lower your credit utilization ratio; and hold off on applying for new lines of credit as the application could require a hard inquiry that hits your credit.
