The Fed holds interest rates steady. Here's when a rate cut could happen. (2024)

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The Fed holds interest rates steady. Here's when a rate cut could happen.? ›

Some Wall Street analysts still forecast multiple rate cuts in 2024, which they predict will kick off with the September meeting. Earlier this year, the Fed had projected just one reduction this year.

The Federal Reserve left interest rates unchanged at its final policy meeting of 2023, while signaling that 2024 could bring significant rate cuts. Why it matters: The decision to leave rates unchanged in a 5.25% to 5.5% range for the third consecutive meeting.

Larger rate cuts would provide welcome relief to borrowers, including home and car buyers who have been priced out of the market due to high financing costs. The downside would be felt by savers, given that high-interest rate savings accounts and CDs would likely offer less favorable terms following Fed cuts.

The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.

The Fed decided not to cut rates during its most recent meeting, it announced on Wednesday. Fed Chair Jerome Powell said the central bank still needs to see more data showing that inflation is dropping enough to justify cutting rates.

The Federal Reserve determines the price of borrowing money through one of its primary interest rates, the fed funds rate. The fed funds rate influences various financial decisions and products, such as credit card rates and mortgage rates.

Generally, with steady interest rates, you might not experience tighter budgets for debt repayments. This stability allows for more predictable financial planning, particularly for those with variable-rate debts like credit cards or adjustable-rate mortgages, which won't see hikes in interest expenses.

Typically, a rate cut lowers the cost of financing a home. However, the extent of the benefit from lower mortgage rates depends on the type of mortgage loan. For fixed-rate mortgages, a rate cut will have no impact on the amount of the monthly payment.

Lenders could get caught between falling yields and rising deposit costs, especially if loan growth is slow. With the Federal Reserve poised to begin cutting interest rates, banks stand to benefit. But not right away.

The beginning of rate cuts will signal that "the Fed has the market's back," said Yung-Yu Ma, chief investment officer at BMO Wealth Management. He expects the central bank to cut rates about six times over the next year. “We think that's definitely a positive factor both for the markets and the economy,” he said.

Who benefits from high interest rates? ›

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

Since savers don't know which way rates will move next, advisers often recommend a CD ladder. This means buying a series of CDs with progressively later maturity dates. Laddering ensures that some portion of your savings matures each year and can be spent or moved into other investments as rates change.

Raising borrowing costs for consumers theoretically means they have less to spend on other goods and services. Just as importantly, it raises borrowing costs for businesses, reducing demand for investment and lowering profits. This lowers their ability to employ people or give inflation-busting pay rises.

The last emergency rate cut was in March 2020, when the economy was free-falling due to the coronavirus pandemic, which shuttered businesses across the globe. "Intra-meeting cuts have typically only happened in the event of financial crisis," Shah noted.

In June, the consumer price index fell to 3%, the lowest it's been in over three years. At that point, the Fed projected the fed funds rate would be cut to 5.1% by the end of 2024. The CME Group's FedWatch tool, which measures the probability of a rate adjustment, has predicted the first cut will come in September.

The Fed also issues cash, which pays no interest, so the Fed makes steady money on the difference between interest-bearing assets and the zero return of cash. But when the short-term rates the Fed pays rise sufficiently to make its interest expenses greater than its interest earnings, the Fed loses money.

The U.S. Fed is one of the only major central banks to keep its high rates unchanged, since major economies started a policy of monetary tightening in the wake of high inflation following the pandemic.

Mortgage Rate Predictions for 2024

While this should prompt a gradual easing of mortgage rates, the mortgage giant expects mortgage rates to remain above 6.5% through the end of the year and then descend below 6.5% in 2025.

Members of the Federal Open Market Committee, the central bank's rate-setting panel, said in a policy statement on Wednesday they will hold the federal funds rate in a range of 5.25% to 5.5%, leaving it at its highest level in 23 years.

The Federal Reserve works to promote a strong U.S. economy. Specifically, Congress has assigned the Fed to conduct the nation's monetary policy to support the goals of maximum employment and stable prices. Those two goals are often referred to as the Fed's "dual mandate."