What's next for US interest rates?

Cuts are coming, but not quite yet

A pensive Jerome Powell sits under a row of intense lights
The Fed forecast at its December meeting that it "will cut borrowing costs three times in the coming year"
(Image credit: Tom Williams / CQ-Roll Call / Getty Images)

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The Federal Reserve held interest rates steady once again at its January meeting, its first of 2024. That leaves the central bank's benchmark interest rate between 5.25% and 5.50%, where it has remained since July and which marks its highest level in 22 years.

At some point in the future, however, the Fed does plan to start slashing rates. As for when those cuts will arrive, the Fed's policy-setting committee said in a statement that it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent," The New York Times reported.

What will the Fed do next?

The Fed does have plans to cut rates, and according to Powell, those cuts will "likely begin at some point this year," said CNBC. But for now, the Fed wants to await further evidence that its fight to bring down inflation is an enduring success.

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"We've made a lot of progress on inflation. We just want to make sure that we do get the job done in a sustainable way," Federal Reserve Chair Jerome Powell said at a news conference following the January meeting, The Wall Street Journal reported.

When is the next interest rate decision?

The Federal Reserve next meets March 19-20. While rate cuts are on the table for some point in the future, Powell indicated after January's meeting that he did not think it was "likely that the committee will reach a level of confidence by the time of the March meeting" to cut rates.

How do interest rates affect the economy?

The Fed uses interest rates "like a gas pedal and a brake pedal," Forbes said. 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 said. But the stock market reacts immediately. For example, when Fed chairman Jerome Powell signaled last year 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," said Reuters.

What do rate hikes mean for your wallet?

As Kiplinger said, "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 flip side, 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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