Fed Rate Predictions: Forget Interest Rate Cuts. One Economist Says Rate Hikes Are More Likely This Year

We started the New Year with high expectations for lower interest rates, but could the reverse happen? Experts expect the Federal Reserve will hold rates steady at its meeting next week, and one economist says rate hikes are more likely than cuts this year, as the Fed tries to squash stubbornly high inflation.

The Fed paused the federal funds rate at a target range of 5.25% to 5.5% in August last year after raising interest rates 11 times between March 2022 and July 2023. Inflation reacted quickly, dropping from its high of 9.1% in June 2022 to 3% one year later. But inflation has been hovering around 3% since then, above the Fed’s target rate of 2%.

An unexpected jump in inflation last month combined with a strong jobs report for March could convince the Fed that the current interest rates aren’t high enough to turn the tide, according to Gregory Heym, chief economist at real estate service company Brown Harris Stevens.

“I don’t see any way the Fed can cut rates this year, as hiring remains strong and inflation is still above their 2% target,” he said. “There’s a better chance they hike rates than cut them this year.”

In the leadup to the Fed’s meeting next week, comments from the New York Fed President John Williams, Atlanta Fed President Raphael Bostic and Fed Chair Jerome Powell all indicate that no one should be getting their hopes up that the Fed will cut rates soon.

“Given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work,” Powell said last week during a panel discussion in Washington, DC, noting that the recent inflation data “has not given us greater confidence.”

Interest rates are the highest they’ve been in over 20 years. Last year, the Fed suggested that enough progress had been made on inflation that in 2024 it would likely make three cuts. But four straight months of inflation holding steady or ticking up has left the Fed reiterating that it intends to cut interest rates at some point, but not until inflation gets closer to 2%.

More signs of inflation’s resurgence continued this week with a report that the personal consumption expenditures price index, a key inflation measure for the Federal Reserve, rose 3.4% in the first quarter compared with 1.8% in the fourth quarter, according to the Commerce Department’s Bureau of Economic Analysis.

With the remaining meetings scheduled in June, July, September, November and December, and inflation hanging on, the window for rate cuts in 2024 is quickly closing.

“They’ve gotten inflation below 4%, now they have to get it to 2,” Heym said. “The last leg of this is going to be the hardest.”

What does this mean for your money?

With rates expected to stay high or increase this year and inflation still higher than the Fed’s goal, you’re likely feeling the financial sting. Experts suggest reviewing your budget to try to free up more money for essentials, debt payments or savings goals.

If you have credit card debt, expect your APRs to stay high through the year and go up if the Fed decides to raise rates again. You might consider a balance transfer, debt consolidation loan or another debt repayment strategy to help rein in what you’re paying in interest. If you were waiting for rates to drop to buy a home, don’t expect major relief any time soon. But this expert advice on how to better afford a mortgage right now could help.

In the meantime, you can expect to keep earning a high rate of return on your savings until the Fed signals its nearing its first rate drop. Although banks have lowered their savings rates from the record highs of last year, you can still lock in annual percentage yields of 5% or more on your money. Online banks tend to offer the highest rates on high-yield savings accounts and CDs. But you might also check out offers at your local credit union.

We’ll update you next week when the Fed makes its next rate decision.