At the Federal Open Market Committee’s last meeting of the year Wednesday, the Federal Reserve announced it’s leaving the federal funds rate unchanged. That keeps the rate at 5.25% to 5.50% until its next meeting on Jan. 31.
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.
To tame inflation, the central bank has carried out a series of rate increases since early 2022. But the Fed has taken a breather from its aggressive rate-hike policy since July, indicating that it could be nearing the end of its cycle. Still, the Fed’s ultimate goal is to bring inflation down to 2%, and November’s inflation data still showed consumer prices growing by 3.1% year over year.
“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2% inflation objective is not assured,” said Fed Chair Jerome Powell, in a press release Wednesday. “We are prepared to tighten policy further if appropriate.”
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.
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What’s next for the Fed in 2024?
Most experts agree that rate hikes are over for now, but the inflation data in the coming months will help determine the Fed’s next move.Experts expect the Fed will begin dropping rates at some point in 2024, but not right away. “The current data points to a resilient economy, and the Fed is unlikely to cut rates in early 2024 while inflation still remains above the 2% target,” said Frank Lietke, executive director and president at Ally Invest Securities.
The Fed also acknowledges that rate cuts are likely next year. “If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6 percent at the end of 2024,” said Powell.
That doesn’t mean rate hikes are off the table entirely, though. The Fed has built room for economic uncertainty into its plan. “If the economy does not evolve as projected, the path for policy will adjust as appropriate,” said Powell.
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, but not right away
Average mortgage rates are finally below 8%. And if we’ve seen the last of the Fed’s rate hikes, 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.
Keep in mind that it’s normal to see mortgage rates fluctuate from week to week, and the rate changes you may see in the coming weeks may be temporary.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 20.72% as of Dec. 6, according to Bankrate. The rate has remained the 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 closer to the middle of the year, said Lietke.
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. Most high-yield savings accounts we track offer APYs above 5%. Many of the best CDs offer rates between 4% and 5% APY, and you may be able to find select terms offering 6% or more.
Over the past year, interest rates for these low-risk savings accounts have steadily increased. But with the Fed pausing rate hikes, banks may not increase rates as frequently for savings and CD accounts. However, experts believe that rates will remain high until the Fed signals it may start 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 next year 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.
“I believe the rates on high-yield savings accounts and CDs will come down, but likely not until we are well into 2024,” said Patrick Marcinko, a certified financial planner.
For now, unless there are major changes to economic data, short-term CDs and high-yield savings accounts won’t see big changes until early summer of 2024, he said.
