As the Federal Reserve gears up for its latest policy announcement on Wednesday, consumers burdened by high inflation and borrowing costs are eagerly awaiting any signs of relief. However, most experts predict the central bank will maintain its current interest rates.
Inflation and Interest Rates: A Stalemate
With inflation persistently above the Federal Reserve’s 2% target, the majority of economists surveyed by FactSet anticipate that the federal funds rate will remain in the 5.25% to 5.5% range. This rate, the highest in 23 years, has been unchanged since July 2023. The primary concern for consumers and investors now is understanding the Fed’s future rate trajectory.
Federal Reserve officials had initially forecasted three rate cuts for this year, but persistent inflation has complicated their plans. Stephen J. Rich, CEO of Mutual of America Capital Management, remarked, "Inflation is proving to be sticky in the near term, and continues to linger above the Federal Reserve's 2% target. This will likely keep the Fed on hold through the summer, although the consensus is that inflation will gradually decline over the remainder of the year."
Impact on Everyday Americans
The delay in rate cuts disproportionately affects lower- and middle-income households. Elevated inflation drives up costs for essentials like groceries and rent, while high borrowing costs make managing credit card debt and loans increasingly challenging.
When Might Rates Be Cut?
Despite widespread anticipation, the upcoming June 12 meeting is unlikely to bring a rate cut. According to FactSet, nearly 90% of economists believe rates will also hold steady at the July 31 meeting. The first potential reduction could be at the September 18 meeting, with about half of economists predicting a cut then.
Inflation has eased from its June 2022 peak of 9.1%, with April 2024 seeing a 3.4% annual increase in consumer prices. The Fed’s preferred inflation measure, the Personal Consumption Index, showed a 2.7% increase over the past year in April. If inflation data continues to improve, it could bolster the case for a rate cut later in the year.
2024 Rate Cut Forecasts
Wall Street will closely watch for any indications from the Fed regarding its 2024 rate cut plans. Although initially predicting three cuts, some experts now foresee fewer reductions. Solita Marcelli of UBS Global Wealth Management, for instance, anticipates two cuts this year, beginning in September.
Fed’s Decision-Making Factors
Federal Reserve Chairman Jerome Powell has emphasized the importance of maintaining high rates until inflation nears the 2% goal to avoid premature rate cuts that could trigger further price increases. Despite inflation's decrease from last year’s highs, it remains around 3.4% to 3.5% in 2024, driven by higher housing costs.
Wednesday’s Consumer Price Index release from the Department of Labor will provide more insights. Economists expect May’s inflation rate to remain at 3.4%, consistent with April's figures.
Consequences for Borrowers and Savers
With the Fed likely to keep rates unchanged, mortgage, auto loan, and credit card debt costs will remain high. Although the Fed doesn’t set mortgage rates directly, its policies significantly influence them. LendingTree senior economist Jacob Channel noted that mortgage rates could hover around 7% for a while.
"It is becoming clearer and clearer that the Fed isn't going to lower interest rates anytime soon," said Matt Schulz, LendingTree credit analyst. This outlook is discouraging for those dealing with debt, highlighting the importance of paying off balances or considering balance-transfer cards.
On the upside, high-interest savings accounts and certificates of deposit remain attractive options for savers, although some banks have slightly lowered their rates in anticipation of future Fed cuts, according to Ken Tumin, banking expert at DepositAccounts.com.
As the Federal Reserve's decision approaches, consumers and investors alike will stay tuned for any updates that could influence their financial planning and economic outlook.