What's next for US interest rates?

In December, at its last meeting of the year, the Federal Reserve once again cut interest rates, marking the third time in a row it has done so after previously leaving rates untouched for months. The quarter-point cut means the central bank's overnight borrowing rate now sits at a range of 3.50% and 3.75% — a total of 0.75 percentage points lower than where it was at the start of the year.

The decision was not a straightforward one for the Federal Open Market Committee, which agreed to slash rates in a 9-3 vote, with "some members favoring cuts to head off further weakness in the labor market and others thinking the easing has gone far enough and threatens to aggravate inflation," said CNBC. In its next moves, the Fed will have to balance the dual threats of persistent inflation and rising unemployment.

What will the Fed do next?

Federal Reserve Chairman Jerome Powell did not offer any indications of where rates are headed next at the press conference following the December meeting.

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"We're going to get a great deal of data between now and the January meeting — the data we get will factor into our thinking," Powell said, pointing to the coming November inflation and jobs reports that were previously delayed due to the government shutdown. "We're well-positioned to wait and see."

Beyond January, the "closely watched 'dot plot' of individual officials' expectations on rates indicated just one cut in 2026 and another in 2027 before the federal funds rate hits a longer-run target around 3%," said CNBC.

The two challenges the Fed is facing are inflation and unemployment. "On inflation, prices remain stubbornly high," said CNBC; meanwhile, unemployment is also ticking up, with potentially more reductions to come. "Unless the labor market weakens sharply," Fed members "may be reluctant to lower borrowing costs much further," said The New York Times.

When is the next interest rate decision?

The Federal Reserve will not meet again until 2026, with its first meeting of the new year slated for Jan. 27-28. While Powell did not commit any particular way for what the committee will do in January, "for now, Wall Street doesn’t expect a January cut, with 25% odds currently being priced in on CME Group’s FedWatch tool," said Fortune.

How do interest rates affect the economy?

The Fed uses interest rates to either stimulate or rein in economic activity. Generally, the theory is that "cutting rates decreases borrowing costs, prompting businesses to take out loans to hire more people and expand production," which "in turn, stimulates economic activity and growth," said Investopedia. "Conversely, when the economy is overheating, the Fed may raise rates to cool things down and prevent inflation from spiraling out of control."

What do rate changes mean for your wallet?

Beyond broader economic implications, the Federal Reserve's decisions also hold significance for your finances.

When rates are cut, that provides "some welcome relief for consumers who are in the market for a home or auto purchase, as well as for those carrying pricey credit card debt," said CBS News, by lowering interest rates on those products. On the other hand, rate cuts "could also have a downside of shaving the relatively high returns recently enjoyed by savers," said the outlet.

Meanwhile, when the Fed decides to raise rates, it usually has the inverse effect, in that it will typically lead interest rates on credit cards, auto loans and variable rate mortgages to go up. The good news with rate hikes, though, is that "savings accounts tend to earn more interest," said LendingTree.