What Could Happen to Interest Rates in 2024?

Blog | February 1st, 2024

Investors may label 2024 as the year of transition. Major central banks in 2024 are poised to switch gears and start lowering borrowing costs. This will eventually impact the interest rates.

The crucial concern is whether inflation indicators will swiftly permit policymakers to change course in the upcoming months. It also raises eyebrows in mitigating the repercussions of their previous tightening efforts and preventing a severe economic downturn.

FED and Interest Rate

Over the last two years, everyone has been closely monitoring the actions of the Federal Reserve. They eagerly anticipate the central bank's next steps regarding interest rates. With the prolonged period of rate hikes appearing to conclude or nearing its end, the new query arises: When will the Fed initiate interest rate cuts?

The central bank possesses the authority to adjust the federal funds rate as desired. This rate denotes the interest at which banks can engage in overnight borrowing or lending among themselves. Increasing this rate empowers the Fed to reduce the available money supply and elevate borrowing costs. The central bank can change this rate to regulate the economy's pace.

Take 2020 as an example. The Fed reduced this rate to 0% to promote spending and boost the economy in response to the pandemic-induced slowdown. However, in March 2022, it reached nearly 9% and commenced raising interest rates to heighten the cost of borrowing. The intention was to temper the economy and curb the rapid price surge across various goods and services.

UBS Forecast

The highly prominent Fed easing cycle expected to begin in March 2024 is one of the main aspects of UBS's estimate, according to a team led by Bhanu Baweja and Arend Kapteyn. They also predict that in the first half of 2025, rates will drop to a meager 1.25%.

UBS added that the Federal Reserve's reductions would react to the projected U.S. recession in the second and third quarters of 2024. This will be coupled with the continuing deceleration in headline and core inflation.

Forecast: Credit card rates dip slightly below the 20% mark.

The average credit card rate climbed from 16.34% to nearly 21% in 2022 due to the central bank's rate hikes. It almost reached an unprecedented peak.

There is little expectation for a significant improvement in the annual percentage rate in the future.

According to Chief Financial Analyst McBride, credit card rates are likely to decrease once the Federal Reserve begins cutting, and even then, the reduction will only bring a slight easing from the exceptionally high levels.

McBride stated, “The average rate is projected to persist above the 20% threshold for most of the year, eventually dropping to 19.9% by the end of 2024 as the Fed implements rate cuts.”

Forecast: Mortgage rates may decline to 5.75%

The mortgage rates are already high, and 2023 marked the least affordable year for homebuyers in at least 11 years. A well-known real estate company called Redfin reported this data.

However, rates have experienced a significant decline since reaching 8% in October. Presently, the average rate for a 30-year fixed-rate mortgage stands at 6.9%, compared to 4.4% at the onset of the Federal Reserve's rate hikes in March 2022 and 3.27% at the close of 2021.

Experts are forecasting a further easing of mortgage rates in 2024, although they are not expected to return to the lows observed during the pandemic.

Forecast: Auto loan rates edge down to 7%

Consumers are increasingly finding themselves grappling with monthly car payments. These are stretching their budgets, courtesy of higher vehicle prices and increased interest rates on new loans.

According to the Bankrate website, the average rate on a five-year new car loan has risen to 7.71%, compared to the 4% recorded when the Federal Reserve commenced its rate hikes.

However, financial analysts noted that rate reductions by the Fed would alleviate the growing expense of financing a car. The experts are expecting a decrease in the rates for five-year new car loans to 7% by the year's end.

Forecast: High-yield savings rates stay over 4%

High-yield online savings account rates have gradually shifted with adjustments to the target federal funds rate. It is now exceeding 5%, the most savers have seen in nearly two decades, a notable increase from around 1% in 2022.

While it is likely that these rates have reached their peak, financial analysts suggest that “yields are anticipated to persist at the highest levels in over a decade, despite two rate cuts from the Fed.”

According to expert projections, the most lucrative offers available in the market will still be at 4.45% in the coming year.

Key Takeaway

Federal Reserve officials anticipate four major interest rate cuts in 2024, which are mentioned in this blog. We have outlined this article by taking notes from the recent summary of economic projections.

There is no doubt that bonds and real estate investment trusts (REITs) stand to gain, and investors can secure current rates on certificates of deposit (CDs).

The only critical concern is the delicate balance between inflation indicators and policymakers' ability to change the interest rate. Keep updated with the latest announcements and policy amendments. Make sure you follow every step of FED.

Related: Living on Less: The Art of Frugality and Financial Freedom