Interest Rates

When Will the Federal Reserve Cut Interest Rates? (What You Need To Know)

Prediction markets currently say it is more than 90% likely the Federal Reserve will cut interest rates at least two times in 2024. If interest rates are cut, it may affect how much you earn in your savings account, how much it costs to borrow money for purchasing a car, house, or anything else, and it could even impact your investment portfolio. Here’s how interest rates are expected to change in 2024 and how you can prepare your finances.

Will interest rates go down in 2024?

The Federal Reserve expects to cut rates this year, but may not be in a hurry to do so. Inflation has only recently dropped to under 4% when excluding the more volatile categories of food and energy, and it would not be impossible for inflation to reaccelerate. To further complicate matters, January inflation data came in at 3.1%, hotter than the expected 2.9%.

The Federal Reserve cutting rates is stimulative to the economy; lower interest rates encourage borrowing more and thus spending more. The central bank would like to make sure there is no danger of inflation reaccelerating before lowering interest rates.

It is very likely that interest rates will be cut this year, with markets putting the odds of at least one rate cut this year at around 97%. However, no one can predict the future and unexpected news of inflation increasing could cause the Federal Reserve to change their plans about cutting interest rates in 2024.

How many rate cuts are expected in 2024?

Federal Reserve chairman Jerome Powell said in an interview in February 2024 that the central bank remains on-track to cut interest rates three times in 2024. If rates are cut three times, the federal funds target range would drop from between 5.25% and 5.50% to between 4.50% and 4.75%.

However, three interest rate cuts are not set in stone. It is possible for there to be more or fewer interest rate cuts in 2024 depending on inflation data, jobs data, consumer spending, and other economic indicators.

What will bank interest rates be in 2024?

The best online high-yield savings accounts are currently paying just over 5% annually in interest. If the Federal Reserve cuts interest rates, the rates paid on high-yield savings accounts will also fall. Consumers with money they don’t need to access for a certain period of time may consider high-yield CDs, which can lock-in higher rates now before interest rates start to fall. The extra interest earned in a CD, however, may not be much more than what you would earn in a high-yield savings account over that same period of time.

How will interest rate cuts affect home prices?

Rising interest rates make homes less affordable for anyone looking to buy with a mortgage. Over the last year, the median sales price of homes sold in the United States has dropped from $479,500 to $417,700, a decrease of 12.9%. With average 30-year mortgage rates increasing from under 3% to around 7%, Americans simply aren’t able to spend the same amount on a home. Does that mean that if interest rates drop home prices will increase? Not necessarily.

There are many different factors that affect home prices, including available inventory, how many Americans have jobs (and how much they make), location, interest rates, and more. While interest rates dropping may increase the likelihood of home prices rising, it is not certain. We don’t know how that will affect the amount of available inventory; with lower rates, that also makes it easier for existing homeowners to sell and for homebuilders to build new homes. 

Do recessions happen after interest rate cuts?

Interest rate cuts are used as a tool to stimulate the economy and increase employment. Typically rate cuts happen near the beginning of a recession, after tight monetary policy, or higher interest rates, has damaged the economy and increased unemployment. However, that has not been the case with the most recent tightening cycle by the Federal Reserve. The unemployment rate remains very low and consumer spending is still healthy, despite higher interest rates.

The Federal Reserve is attempting to walk a tightrope and loosen monetary policy before unemployment rises significantly and consumer spending drops, but after inflation is under control. This is the so-called “soft landing” that you may have heard about over the last few years. Economic experts believe there are a few reasons why we may avoid a recession. The initial rise in inflation was linked to supply chain issues during the pandemic, which means inflation may have always been destined to fall to a certain extent regardless of interest rates. American consumers were able to save up during the pandemic, and have been able to continue spending because of that excess savings, another possible reason why the economy has avoided a recession.

It appears likely that the Federal Reserve will cut interest rates in 2024. Even if those cuts come to fruition, we aren’t able to know for certain exactly how they will affect the economy and your finances. We do know that interest rates on savings accounts may drop, Americans may be able to spend more on homes, and those with variable debt may be paying a little less in interest. Even if rates are cut three times, or 0.75%, the effect on the economy may not be significant: rates were raised from near 0% to between 5.25% and 5.50% from the beginning of 2022 to late 2023, which makes a change of 0.75% over the course of a year seem like a drop in the bucket.