Consumers will be stuck staring at higher interest rates for longer, very likely well into the summer, now that the Fed took yet another pass on cutting interest rates in 2024.
While the Fed's decision Wednesday might be a boon to savers, it will keep the cost of borrowing high if you're aiming to buy a new or used car or keep pulling out your credit cards.
The Federal Reserve announced Wednesday that its policy committee reached a unanimous decision to keep interest rates where they are now. "Recent indicators suggest that economic activity has continued to expand at a solid pace," the Fed statement began. But the Fed indicated that inflation data in recent months has shown a "lack of further progress" toward reaching the Fed's 2% inflation goal.
As one CNBC guest said earlier Wednesday the Fed is saying "Ready, set, wait."
We can blame the latest, trendy economic wonkery called "sticky inflation." It's the opposite of "transitory inflation," a much bandied-about term often used three years ago by then-Federal Reserve Chair Janet Yellen, which didn't prove to be grounded in reality. Inflation — which took off like a rocket during the pandemic and peaked at 9.1% in June 2022 — didn't go away in a few months or even a year after supply chain disruptions were fixed.
Inflation has most certainly cooled down — hitting 3.5% year-over-year in March — but it's still been way too hot for many consumers, and, yes, the Fed. Some might even use the term "persistent inflation," but apparently "sticky" offers more hope that inflation ultimately will soon calm down. And sticky is far more better than "entrenched."
Really, now we're looking at only one rate cut ahead in 2024?
The small string of rate cuts that many economists had expected in 2024 is getting tinier by the minute.
Federal Reserve Chair Jerome Powell said Wednesday the Fed does not want to dial back interest rates until the Fed has greater confidence that inflation is on a sustainable path toward moving closer to the Fed's 2% target. "It appears that it's going to take longer for us to reach that point of confidence," Powell said in a news conference Wednesday.
He noted that Fed policy has been restrictive, reducing demand in many areas, particularly housing. He expects further progress with inflation moving down more in 2024.
Powell did not offer any hints on when the Fed might cut rates, but he did say it was unlikely at this point that the next policy move would be another rate hike. Powell, who has been a member of the Fed since May 2012, noted that 2024 is his fourth presidential election year and stressed that the Fed focuses on the economic data, not elections, when making decisions about interest rates.
Mark Zandi, chief economist for Moody's, now expects one interest rate cut in December — down from a forecast back in February that once called for four rate cuts in 2024 — a quarter point each time.
"Inflation has been more persistent in early 2024," Zandi said, "and the election is getting in the way of an earlier rate cut."
The Fed doesn't want to appear to favor one political candidate or party over another, so it tends to tread cautiously in a presidential election year. If not for the election, Zandi said, he might be forecasting that the first rate cut could hit in September and then a second in December.
The good news for some consumers, Zandi said, is that mortgage and auto loan rates are expected to trend lower before the Fed actually moves to cut interest rates. Investors in long-term bonds will anticipate a Fed rate cut, driving longer term rates down.
Mortgage and auto loan rates are off their peaks, he said, but these rates still remain very elevated. Zandi expects that mortgage rates and car loan rates will "likely decline in earnest later this summer and fall as it becomes clearer the Fed will begin to ease rates."
But rates on credit cards, consumer finance loans, and other loans won't decline until the Fed actually cuts rates, Zandi said. After one rate cut in December, Zandi is forecasting four more rate cuts in 2025 — one in each quarter of the year.
Election Day is Nov. 5. The Fed has three scheduled meetings between now and then. The last two meetings this year are scheduled for Nov. 6 and Nov. 7 and then for Dec. 17 and Dec. 18.
The Fed had raised short-term rates 11 times starting in March 2022 and ending with the most recent rate hike in July 2023. When interest rates are higher, borrower demand is expected to be lower, causing inflation to cool down, which it did but not enough to meet the Fed's goal of a 2% range over the long run.
At its March meeting, the Fed decided to hold steady, as it did again Wednesday, and maintain the target range for the short-term federal funds rate at 5.25% to 5.5% — where rates remain right now.
What high rates mean for car buyers
"Higher for longer" is a sermon that many economists are preaching in May.
Jonathan Smoke, chief economist for Cox Automotive, said he, too, now would expect only one rate cut in 2024, coming after the election. Back in February, he expected three rate cuts — one each per quarter after the first quarter.
Higher rates — and the ongoing expectation for a round of Fed rate cuts — can be a toxic mix when it comes to car sales. Who wants to take out a high-rate car loan now when you know — after all, that's all you've been hearing for months — that interest rates will fall from here?
On average, Smoke said, car and truck buyers are seeing auto loan rates of 9.7% when they buy new vehicles and 14.1% for the actual average rate when consumers buy used. For new cars and trucks, the average rate is up from 8.9% a year ago and up from 6.1% in May 2022.
The average loan rate for used cars and trucks was 13.5% a year ago and 10.2% in May 2022.
Car and truck sales overall, Smoke said, are likely weaker than they would be if the interest rates weren't as high. On top of that, and perhaps more important, he said new car and truck sales are being hurt by the perception that it’s better to wait to buy until interest rates fall.
"The rest of this spring and summer could be the weakest part of the year with rates having moved higher and consumers delaying purchases," he said.
Consumers continue spending, but they're reluctant to take on high-cost loans to buy big-ticket items, including cars and trucks, homes, furniture and appliances.
"Airports are packed. Sporting events and concerts are sold out," Smoke said. "The new vehicle SAAR (or seasonally adjusted annual rate) can’t manage to get back to 16 million, let alone the 17 million it averaged for years prior to the pandemic."
Car prices are pulling back, ever so slightly.
Year-over-year, used car and truck prices — which skyrocketed during the pandemic — fell 2.2% in March, according to inflation data released by the U.S. Bureau of Labor Statistics. New vehicle prices fell 0.1%.
"Consumers are seeing lower prices in both new and used," Smoke said, "but since rates have moved higher, we’ve seen little progress in monthly payments coming down."
Many cost-conscious buyers are likely delaying making a purchase, trying to wait it out until the much-anticipated Fed rate cuts.
"Not all buyers can wait, but for those who can, they will likely benefit from lower prices and lower rates late this year or into next year," Smoke said.
Smoke said the ongoing lack of urgency to buy could be less intense for new cars if automakers get more aggressive on incentives and financing offers. So far, consumers are only seeing modest increases in incentives.
"And we are not seeing a large share of tempting low interest financing offers or low lease payment deals," Smoke said.
Where are interest rates now?
More rate cuts are likely in the cards in 2025. But, right now, many bond investors are now pricing in only one rate cut for 2024, likely no earlier than November, according to Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com. That's down significantly from six months or so ago, he said, when many investors expected six or seven quarter-point cuts in 2024.
"We've started to see some declines on longer-term rates," Rossman said.
The average 30-year fixed mortgage rate briefly exceeded 8% in late October. And then, he said, the average had fallen below 7% for a short run from December until February. "And now it's 7.31%," Rossman said.
By contrast, the comparable average mortgage rate was 6.48% a year ago and 5.22% two years ago.
"In general, 'higher for longer' rules the day," Rossman said, "and is good news for savers and bad news for borrowers."
Rossman noted the average rate on a one-year certificate of deposit is 2.08% — up from 1.68% a year ago and a mere 0.22% on May 1, 2022.
The average credit card rate has hit 20.66% — up from 20.23% a year ago and 16.4% on May 1, 2022, according to Bankrate.com data.
The average five-year new car loan being marketed is now 7.82% — up from 6.58% last year and 4.47% on May 1, 2022, according to Bankrate.com.
The average rate for a home equity line of credit is now 9.1% — up from 7.99% a year ago and 4.15% on May 1, 2022, according to Bankrate.com. But Rossman noted that HELOC rates have fallen more than a percentage point since early January.
By contrast, savers who shop around for higher rates are still seeing strong options.
The latest annualized rate for inflation-indexed savings bonds is 4.28% for bonds issued from May 1 through October, according to the U.S. Treasury Department. That includes a fixed rate of 1.3%. The interest rate on a Series I savings bond can change every six months after you bought the bond, based on inflation. The rate can go up or down.
The current I Bond rate is down from the 5.27% annual rate on I Bonds bought from November 2023 through April. But it's nearly the same as the rate offered a year ago on I Bonds issued from May 2023 through November 2023 when the annual combined rate was 4.3%. (The fixed rate on I Bonds issued from May through October last year, though, was only 0.9%. The fixed rate applies to the 30-year life of the bond.)
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The best yielding five-year CD is 4.55% now but that's only down slightly, Rossman said, from a peak of 4.85% last October.
Savers want to lock in some higher rates, especially if they expect the Fed to cut rates down the road. Or they can also take advantage of higher yielding savings accounts that are paying more than 5% now, according to Rossman.
Those with strong credit can still shop around for 0% balance transfers on credit cards, as those promotions are still widely available, Rossman said.
"Unfortunately, 'higher for longer' should continue to put a major damper on the housing market," he said.
High mortgage rates on top of high home prices in many markets make homes increasingly unaffordable or unappealing for many buyers.
"Few existing homeowners are interested in trading their 3% or 4% (mortgage) rate for a 7% or 8% rate," Rossman said, "contributing to low inventory and further fueling high prices for the few homes on the market."
Contactpersonal finance columnist Susan Tompor:[email protected].Follow her on X (Twitter)@tompor.
