What the Federal Reserve’s next move means for the rates you pay

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The next Fed cut will likely be in June, says Morgan Stanley's Seth Carpenter

The Federal Reserve announced Wednesday it will leave interest rates unchanged, setting the stage for rate cuts to come and paving the way for relief from the combination of higher rates and inflation that have hit consumers particularly hard. 

Although Fed officials indicated as many as three cuts coming this year, the pace that they trim interest rates is going to be much slower than the pace at which they hiked, according to Greg McBride, chief financial analyst at Bankrate.

“Interest rates took the elevator going up; they are going to take the stairs coming down,” he said.

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Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to its highest in more than 22 years.

The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.

Below the surface, 60% of households are living paycheck to paycheck.

Greg McBride

chief financial analyst at Bankrate

“Below the surface, 60% of households are living paycheck to paycheck,” McBride said. Even as inflation eases, high prices continue to strain budgets and credit card debt continues to rise, he added.

Now, with rate cuts on the horizon, consumers will see some of their borrowing costs come down as well, although deposit rates will also follow suit.

From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at where those rates could go in the year ahead.

Credit cards

Mortgage rates

Due to higher mortgage rates, 2023 was the least affordable homebuying year in at least 11 years, according to a report from real estate company Redfin.

Although 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.

But rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is 6.9%, up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.

Doug Duncan, chief economist at Fannie Mae, expects mortgage rates will dip below 6% in 2024 but will not return to their pandemic-era lows, which is little consolation for would-be homebuyers.

“We don’t see the affordability problem solved until supply increases substantially, interest rates come down and real incomes rise,” he said. “The combination of those things need to move together over time. It’s not going to be sudden.”

Auto loans

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

As a result, top-yielding online savings account rates have made significant moves and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

Although those rates have likely maxed out, “it will be another good year for savers even if we do see rates come down,” McBride said. According to his forecast, the highest-yielding offers on the market will still be at 4.45% by year-end.

Now is the time to lock in certificates of deposit, especially maturities longer than one year, he advised. “CD yields have peaked and have begun to pull back so there is no advantage to waiting.”

Currently, one-year CDs are averaging 1.75% but top-yielding CD rates pay over 5%, as good or better than a high-yield savings account.

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