The Federal Reserve reduced borrowing costs again at its final gathering of 2024, but officials penciled in two fewer cuts for the year ahead as inflation stays stubbornly above their target.
The Federal Open Market Committee (FOMC) cut rates by a quarter of a percentage point, marking the third consecutive rate cut since September. The move means officials have now slashed the Fed’s key benchmark interest rate — the federal funds rate — a full percentage point, bringing the new target rate down to 4.25-4.5 percent.
Borrowers are bound to see financing rates edge lower on the key rates that move in lockstep with the Fed, such as credit cards, auto loans and home equity lines of credit (HELOCs). Mortgage rates, however, aren’t guaranteed to fall. Those longer-term interest rates have decoupled from the Fed, driven by a surge in the 10-year Treasury yield as investors brace for a stronger economic outlook and hotter inflation. The 30-year fixed-rate mortgage has actually increased since the U.S. central bank cut borrowing costs in September for the first time since 2020.
Savers, however, have something to celebrate. Yields on the highest-yielding online savings accounts and certificates of deposit (CDs) are continuing to outpace inflation. The Fed keeping interest rates higher for longer could help them hang onto those decade-high returns for the foreseeable future.
Fed officials are starting to tear up their rate-cutting playbook for 2025 as inflation looks like it may be moving sideways. Prices rose 2.7 percent in November, up from a three-year low of 2.4 percent in September, according to the latest inflation rate data from the Bureau of Labor Statistics (BLS). Several key household items jumped in price, such as groceries and gasoline.
In fresh projections released along with the Fed’s decision to cut interest rates, policymakers started to coalesce around fewer cuts for 2025. Three officials now expect to see just one rate cut, while 10 policymakers expect two cuts, becoming the new median projection. At the time of their previous update in September, officials’ median estimate called for four rate cuts in the year ahead. Eight officials saw five or six rate cuts.
Fed Chair Jerome Powell has also said that the U.S. economy looks like it’s in much better shape than it did in September, when an abrupt slowdown in the job market led officials to cut borrowing costs by half a percentage point. The consequence, though, is that it might take longer for price pressures to return to officials’ 2 percent goalpost.
Even so, inflation has still come down from its post-pandemic peak, while a slowdown in the job market has been undeniable. Unemployment recently moved up to 4.2 percent in November, while Americans who are unemployed are finding it harder to get a new position, according to the latest data from the Department of Labor. Officials have said they don’t want to see those job opportunities cool even more.
The Fed’s two-pronged decision at its December meeting — cutting borrowing costs today but taking a cautious approach with future cuts — struck a balance between doing too much and doing too little, Powell indicated at the Fed’s post-meeting press conference. Even so, Cleveland Fed President Beth Hammack dissented against the decision to reduce rates a third time. Three other officials who couldn’t formally dissent because they don’t have a vote on policy this year also revealed that they preferred to leave rates alone in December.
“Today was a closer call, but we decided it was the right call,” Powell said at the Fed’s post-meeting press conference. “From here, it’s a new phase, and we’re going to be cautious about further cuts.”
Slowing down the pace of future rate cuts means borrowing costs are bound to continue pinching consumers — even after three rate cuts. Before the Fed’s rapid post-pandemic inflation fight, the Fed’s key benchmark hadn’t hit this high of a level since 2007.
“Higher for longer is the mantra headed into 2025,” says Greg McBride, CFA, Bankrate chief financial analyst. “A slower pace of interest rate cuts in 2025 means borrowers will have to continue doing the heavy lifting of aggressive debt repayment. Borrowing rates for variable rate debts such as credit cards and home equity lines of credit are high and won’t come down fast enough to provide meaningful relief.”
The Fed’s interest rate decision: What it means for you
Savers
Yields haven’t fallen as much as expected this year. At the start of 2024, McBride saw the top-yielding 1-year CD falling to 4.25 percent annual percentage yield (APY), while the top savings account was expected to offer 4.45 percent APY. As of Dec. 10, the highest-paying 1-year CD was offering 4.59 percent APY, while the top savings yield hit 4.85 percent, Bankrate’s research shows.
Meanwhile, all of Bankrate’s picks for the best online banks in December are currently offering yields that are higher than the current annual inflation rate of 2.7 percent, according to the latest data from the BLS’ consumer price index (CPI). That gives consumers an opportunity to grow their purchasing power — without taking on any risk thanks to Federal Deposit Insurance Corp. (FDIC) protections.
Only the savers who keep their cash in a nontraditional online bank are reaping the rewards of a high-rate era. Yields on savings accounts at the nation’s biggest banks, such as Chase and Bank of America, have barely budged, hovering between 0.01-0.05 APY. Parking your cash in a bank where it’s rewarded can help consumers grow their savings faster, and yields at those institutions are poised to fall less in the future as interest rates stay high.
Meanwhile, if you already have at least six to nine months of expenses stashed away for emergencies, a CD can be a strong hedge against future rate decreases.
Borrowers
Borrowing costs aren’t as high — but they’re still historically high. That means the consumers who remember just how cheap it used to be to finance a big-ticket purchase before the pandemic might still experience some sticker shock after the Fed’s latest interest rate cut.
Credit card borrowers are still painfully high for those carrying debt. The average credit card annual percentage rate (APR) is still above 20 percent, according to Bankrate’s data. Lower interest rates aren’t going to take away the pain of high-cost debt, either. When the Fed’s rate held at near-zero during the pandemic, credit card interest rates hovered around 16 percent.
Bankrate’s rankings of the best balance-transfer cards currently give Americans an introductory 0 percent APR for as long as 21 months. If you’re able to eliminate that balance before you transition back to the standard APR, you could significantly speed up your debt repayment and save hundreds, if not thousands, of dollars in interest. Just note how much it costs to transfer that balance, usually anywhere between 3 to 5 percent of the total debt that you transfer.
Meanwhile, if you’re about to make a big-ticket purchase and can’t wait for future rate cuts, be sure to compare offers from at least three lenders to ensure you’re locking in the best deal.
Homeowners and homebuyers
It seems like prospective homebuyers — and even the Americans still lucky enough to find a home in their price range — just can’t win these days.
Sure, the 30-year fixed-rate mortgage has edged lower since the Fed last cut borrowing costs in November, sinking to 6.78 percent from 7 percent on Nov. 7. But mortgage rates remain more than half a percentage point higher than they were when the Fed first cut rates in September, according to Bankrate data.
Homeowners who locked in a mortgage when rates were at their peak of 8.01 percent may still have a refinance opportunity in front of them. But those savings aren’t as great as they would’ve been had homeowners transferred their debt to a new mortgage back in the fall.
Not to mention, home prices are continuing to top record highs, and the supply shock may continue as homeowners who locked in historically low mortgage rates during the pandemic refuse to trade their rate.
Mortgage rates will stay elevated until there’s a clearer path toward lower inflation. For now, uncertainty surrounding President-elect Donald Trump’s policy proposals of higher tariffs and lower taxes might be putting even more upward pressure on those longer-term interest rates.
Yet, buyers are never advised to time the market. Prudent financial steps such as paying down debt, bolstering one’s income and saving for the future are all key for homeownership — which can happen while shoppers wait for the right time to buy.
Investors
The S&P 500 has soared this year, starting first as the U.S. economy remained stunningly resilient to higher interest rates and continuing in November after the U.S. presidential election. Americans’ retirement account balances are likely looking especially rosy because of it. American households’ net worth hit a new record high in the third quarter, according to the latest data from the Fed.
Still, what goes up can always come back down. After the Fed cast doubt over its future plans, the S&P 500 closed almost 3 percent lower on Wednesday, posting its worst day since August. The Dow Jones Industrial Average dropped more than 1,000 points, closing down for the 10th day in a row — the worst losing streak in half a decade.
If you’re saving for a longer-term goal anywhere between more than five or 10 years into the future, don’t sweat it. Downdrafts in the market can provide a significant buying opportunity, and adjusting your investments because of day-to-day volatility can come with tremendous opportunity costs.
Powell stopped short of indicating that officials will take the early months of 2025 off from cutting interest rates. Rather, he said that the timing for future interest rate cuts will depend on further progress on inflation — while also describing the U.S. economy’s current state as “remarkable.”
“The economy remains in very good shape,” McBride says. “Don’t let short-term volatility distract you from long-term objectives, as the economic fundamentals that contribute to the corporate profits that drive stock prices remain very positive.”
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