This year looks to be a turning point in the steady upward march of interest rates, with consumers poised to benefit from cheaper borrowing costs.
After raising its benchmark interest rate 11 times since March 2022 to the highest level in 22 years, the Federal Reserve has held rates steady at a range of 5.25% to 5.5% since July. During its December 2023 meeting, the Fed forecast three quarter-point rate cuts in 2024, which could bring the federal funds rate to a range of 4.5% to 4.75% by the end of 2024.
“The Federal Reserve will remain data-dependent in making the ‘when’ and ‘how much’ decisions on the federal funds rate,” said Richard Wobbekind, associate dean for business and government relations at the Leeds School of Business and faculty director of the Business Research Division. “The most recent employment numbers, which included over 4% wage inflations, seem to support holding steady through the first half of the year.”
Rate cuts in 2024 would be good news for consumers since the federal funds rate is a benchmark lenders use to determine borrowing costs on everything from auto loans and credit cards to mortgages.
Still, it’s unlikely that rates will return to the ultralow levels of the 2010s, according to Shaun Davies, associate professor of finance at Leeds and research director of the Burridge Center for Finance.
“We have an entire generation that has started their careers and their families only knowing a low interest-rate environment,” Davies said.
Today’s rates are relatively high compared to rates in the years following the 2008 global financial crisis and early in the COVID-19 pandemic. Given longer-term indicators in the bond market, consumers should brace for an era of sustained higher interest rates, according to Davies.
“We have to get used to paying more for consumer debt—paying more in credit card interest, more in student loan interest, more in mortgage interest and more in car loan interest,” he said. “It’s just going to cost more to borrow.”
The prospect of peaking interest rates is fueling some optimism among analysts and business leaders about the economy in 2024. Here’s what it could mean for savers, investors, homebuyers, workers and consumers.
Higher interest rates have been good for savers since banks use the federal funds rate as a benchmark when setting interest rates on savings products like certificates of deposit and money market accounts. If the Fed cuts rates in 2024, the annual percentage yield, or APY, could drop on these products.
CDs offer savers a low-risk way to hold on to the attractive yields banks are offering today, the best of which are north of 5.5% APY.
“It might be advantageous to lock your money in a CD account,” Davies said. “If you can get a guaranteed 5.5% for the next year in exchange for liquidity, that’s pretty good. Especially if inflation is running at 2% or 3%, that's a real rate of return of over 2%, which is really nice for something that's essentially risk-free.”
When interest rates fall, stocks tend to rise. But rate cuts from the Fed are not set in stone, and there are plenty of other unknowns.
“In addition to the obvious focal points of employment growth and wage and price inflation, the Federal Reserve needs to keep a watchful eye on other areas as well,” said Wobbekind. “Political and military tensions could cause supply chain disruptions. In addition, the refinancing of commercial real estate buildings and the growing federal deficit could have significant impacts on the banking system.”
If rates fall in 2024, bonds are poised for a rebound, which could benefit people nearing or in retirement.
“Prior to COVID or even during COVID if you owned a bond portfolio, you were making almost nothing on it and you had to reach for yield by maybe buying riskier corporate bonds or using other strategies,” Davies said. “Now you can actually make a decent return in real terms, not just nominal terms.”
Homeowners and homebuyers
Homeowners with adjustable-rate mortgages may see lower monthly payments if rates drop, while homebuyers may have the opportunity to lock in a mortgage with a lower rate.
“But if you're holding out for the opportunity for 3.5% or 3% for a 30-year, fixed-rate mortgage, it’s unlikely,” Davies said.
Buyers may see more houses coming onto the market this year and could benefit from the increase in supply, “so the savings in your monthly payment may not come through the interest rate change, but perhaps through a lower purchase price,” Davies said.
Rate cuts typically stimulate the economy because companies are more willing to invest, which bodes well for the labor market.
“Having lower interest rates means firms are able to hire employees and invest in projects,” Davies said.
Still, there could be economic curveballs in 2024. “There are some things that are a bit frightening, like seeing that savings has dropped a lot for households after the huge buildup early in the pandemic. We're seeing more credit card debt,” Davies said. “There are some signs that even though the economy has been running really well for the past year, there could be some things that we just haven't seen come to fruition.”
Inflation may be slowing, but prices for consumer goods are still high. Regardless, consumers keep spending.
“A reckoning is going to come when people realize that they've overstretched themselves,” Davies said. “The sort of traditional liquidity channels that we've been tapping into for the past 16 years are much more expensive now. All debt is more expensive, and I don't think consumers realize that they're already hemorrhaging.”
Davies is doubtful that robust consumer spending will hold up in 2024. “I think you’re going to see the consumer really pull back over the next year and a half to two years,” he said.
“Just because inflation may have come down doesn't mean prices have come down. It just means that prices aren't going up as quickly, and so I think the consumer is going to start pulling back on more extravagant expenses,” such as travel and tech upgrades, Davies said.
“Maybe rate cuts will help lessen the pain, but I don't think that there's truly been pain felt yet,” he added.