For the third time in a row, the Federal Reserve held interest rates steady at its December meeting. That leaves the central bank’s benchmark interest rate between 5.25% and 5.50%, where it’s remained since July and which marks its highest level in 22 years.
However, in “a sign that the central bank is shifting toward the next phase in its fight against rapid inflation,” the Fed also forecast at its December meeting that it “will cut borrowing costs three times in the coming year,” The New York Times reported. This shift is evidence that “Federal Reserve officials believe inflation could slow more than previously thought,” CNN Business noted, though it still “looks like it may take until 2026 until it settles in at the central bank’s 2% target.”
What will the Fed do next?
After 11 consecutive rate hikes since March 2022, followed by a three-month pause on raising rates, the Federal Reserve began to talk in December about rate cuts. Specifically, policymakers are now projecting three rate cuts in 2024, totaling 75 basis points, or 0.75%.
Beyond that, “they project making four more cuts (a full percentage point) in 2025, and then cutting rates to below 3% by the end of 2026,” The New York Times reported. Ultimately, per the Times, “they still expect rates to settle at about 2.5% in the longer run, as they have since before the pandemic.”
Still, Federal Reserve Chair Jerome Powell remained wary of putting concerns about inflation and a recession totally in the rearview mirror. “No one is declaring victory. That would be premature,” Powell said in a press conference after the December meeting. Further, Powell noted that while policymakers “didn’t write down additional hikes,” they “also didn’t want to take the possibility of further hikes off the table.”
When is the next interest rate decision?
The Federal Reserve won’t meet again until 2024. Its first meeting of the new year is scheduled for Jan. 30-31. The Fed has signaled that it plans to slash rates three times in 2024.
How do interest rates affect the economy?
The Fed uses interest rates “like a gas pedal and a brake pedal,” Forbes explained. Lowering rates stimulates the economy; raising rates slows the economy down. The agency doesn’t actually set the funds rate — banks do that — but “the Fed assumes that banks will use it as a floor in their own lending,” Forbes added.
Rate changes usually take “at least 12 months” to have “widespread economic impact,” Investopedia explained. But the stock market reacts immediately. For example, when Fed chairman Jerome Powell signaled in early March that further interest rate hikes were likely, the market went into a bit of a tailspin. The major indexes each fell more than 1%. Beyond stocks selling off, “Treasury yields rose and the dollar extended again after Powell’s comments,” Reuters reported.
What do rate hikes mean for your wallet?
As Kiplinger puts it, “rate hikes are a blessing and a curse for consumers.” When the Fed raises rates, consumers will pay higher interest rates on debt like credit cards, home equity lines of credit, and private student loans. However, on the flipside, savings rates also tend to increase. In the face of rate hikes, Kiplinger offers the following pieces of advice:
- Pay off any debt. Aim to pay off your debt before interest rates get any higher. While the impact might feel gradual initially, continued increases ultimately can make paying off debt more challenging.
- Lock in rates if you can. For those with a home equity line of credit, consider locking in a lower rate on all of a portion of your balance.
- Take advantage of top savings rates. Finally, take advantage of increasing savings rates. Kiplinger advises consumers that they’ll usually find the best rates at online banks or other online financial institutions, including the ones in the table below.
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Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week’s sister site, Kiplinger.com
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The pause before the cuts
