Reality Check: What Are the Chances the Fed Will Lower Interest Rates This Year?

Earlier this month, one economist predicted we wouldn’t see any rate cuts in 2024. But that may be news to the Federal Reserve, whose Chair Jerome Powell testified in Congress this week that the Fed still expects to lower rates “at some point this year.”

Just don’t expect rate cuts very soon. 

“It would be irresponsible to cut rates when the economy doesn’t need lower rates,” said Gregory Heym, chief economist at real estate service company Brown Harris Stevens, ahead of the Fed’s March 19 meeting. “They’re not going to do anything at this meeting. They’re not going to do anything until the second half of the year.”

With inflation hovering around 3% since June 2023 compared to the Fed’s target rate of 2%, the Fed is likely to hold steady on rates for the short term. The Federal Reserve has paused the federal funds rate at a target range of 5.25% to 5.5% since the second half of 2023.

Other Fed officials have indicated recently that they agree with waiting before reducing interest rates to ensure the Fed is meeting its dual mandate of reaching maximum employment while keeping prices stable.

“At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce the target range for the federal funds rate,” Federal Reserve Governor Adriana D. Kugler said on Feb. 7 at the Brookings Institution in Washington. ”It may be appropriate to hold the target range steady at its current level for longer.”

So why won’t the Fed cut rates sooner?

Why hasn’t the Fed cut interest rates yet?

Those feeling the sting of rising rates may be anxiously awaiting a cut in the federal funds rate, but there hasn’t been much incentive for the Fed to change course based on recent data.

Amid the Fed raising interest rates 11 times between March 2022 and July 2023, the general consensus was that while it may help tame inflation — which dropped from a high of 9.1% in June 2022 to a low of 3% in June 2023 — all those interest rate hikes would cause a recession as businesses pulled back on hiring and investment.

But the recession predicted by many — including the Fed’s staff economists in March 2023 — hasn’t materialized so far:

• The unemployment rate ticked up but remained healthy at 3.9% in February.
• The S&P 500 hit its 15th record of the year when it topped 5,100 last month.
• GDP was stronger than expected throughout 2023, thanks in large part to steady consumer spending.

And inflation has stubbornly hung on — it rose by 0.3% in January to 3.1% over the last 12 months.

When the Fed indicated after its December meeting that there could be multiple rate cuts in 2024, some predicted that the cuts would come as early as March. But that may have been wishful thinking or the market’s attempt to nudge the Fed to bow to peer pressure. 

“The markets tried to force the Fed to take action by making bets,” Heym said. “The Fed wisely said, ‘We don’t want to hear about it.’”

Why does the Fed cut and increase interest rates?

The Federal Reserve manages the money supply in the US, meeting regularly to set the federal funds rate, the overnight interest rate banks charge each other for borrowing and lending. When the Fed raises this benchmark rate, banks tend to follow suit, increasing rates on consumer products like credit cards, loans and savings accounts.

If the economy is struggling — think high unemployment and depressed consumer spending — the Feds may lower interest rates. Lower rates can help boost the economy by making borrowing money less expensive for companies who want to invest and hire, as well as consumers who want to make purchases.

If the economy is doing well — unemployment is low and consumers are spending — the Fed may leave interest rates alone. Don’t mess with a good thing, right?

But if the economy is doing too well — employers have to raise wages to attract and retain employees, and the demand for goods and services causes prices to rise faster than wages — the Fed may raise the federal funds rate. That makes borrowing more expensive and less attractive, which can help bring inflation back down to a “healthy” rate of 2%. And we’re not there yet.

When will the Fed start cutting interest rates in 2024?

Most experts predict interest rate cuts will come in the second half of the year, and potentially as soon as June. But expect the Fed to be cautious about cutting interest rates this year, especially since most experts agree that it waited too long to start raising rates to tackle inflation in early 2021. 

It wasn’t until March 2022 — when inflation hit 8.5% — that the Fed began aggressively raising interest rates in an attempt to slow the economy and curb prices. 

Inflation isn’t something that can be tackled overnight. Even after 11 rate hikes, higher prices are still taking a toll on US consumers. And a sudden drop in interest rates could spur buying that drives prices back up.

“If they start cutting rates too soon, then we could have inflation come back, and that would be disastrous,” Heym said.

And although inflation is significantly lower than a year ago, when it was 6.5%, it’s still more than a percentage point higher than the Fed’s target of 2%. Combine that with unemployment remaining low at 3.7% and consumer spending jumping by 1.8% in January, and the Fed doesn’t have much incentive to lower rates.

“Consumers are still spending money, companies are still hiring,” Heym said. “Looking at that data, it doesn’t call for rate cuts — and neither does the inflation data.” 

But higher interest rates could start having a cooling effect on the economy. Higher mortgage rates have already played a role in the housing affordability issue. Timing an interest rate reduction could allow the Fed to avoid sending the US economy into a recession — that’s called a “soft landing.

Why have some interest rates already gone down?

OK, you say we all need to wait on the Fed before interest rates will drop. But the stock market’s S&P 500 hitting new highs, mortgage rates came down a bit in January and CD rates have been dropping since their 2023 highs. What gives?

Mortgage rates

Mortgage rates fell from their high of 8.1% to the mid-6% range earlier this year but bounced back up to over 7% in February. And they’re not expected to break under 6% until 2025, according to major forecasts.

The recent drop in mortgage rates is due to falling inflation and other economic indicators, including long-term lending rates; remember that the federal fund rate is a short-term overnight interest rate. 

“Mortgage rates can go down long before the Fed starts cutting short-term rates — there’s no direct relationship between the two,” Heym said. “If inflation continues to come down, that’s the important thing to look for.”

His advice: If you’re buying a house for the long term, make an offer when you find the one you love. Make sure to compare loan offers from multiple lenders to find the best rate for you.

Saving and CD rates

If you’re trying to find a place to stash some cash and earn interest on your nest egg, now’s a good time to hop on a high-yield savings account or certificates of deposit.

The sooner you open a high-yield savings account, the more interest you’ll earn before the Fed cuts rates — the best high-yield savings accounts currently boast annual percentage yields around 5%.

Although CDs are no longer at last year’s highs, it’s still a good time to lock in a CD rate, with some terms offering as high as 5.50% APY. But look carefully — the anticipated interest rate cuts have led to lower rates for long-term CDs versus CD terms of one year or less.

Loans and credit cards

If you’re carrying a credit card balance, don’t wait for potential rate cuts to start tackling it. 

Though the federal funds rate only directly dictates lending between banks, this affects the banks’ costs, which are in turn passed on to consumers, affecting interest rates on consumer products, like loans and credit cards. The prime rate, which is the basis for all borrowing rates for bank customers, is derived from the federal funds rate. 

With credit card interest rates currently at 20.75%, according to Bankrate, CNET’s sister site, it’s a good idea to pay off as much credit card debt as your finances will allow to avoid paying more in interest.