Key Takeaways
A two-day meeting of the Federal Reserve's policy committee, which ends on Wednesday, could help shed light on when interest rates will be cut.
Federal Reserve officials have said they will cut the benchmark federal funds rate from its highest level in 22 years, but have not said when.
The federal funds rate affects payments on mortgages, credit cards, and other loans.
Interest rates will fall. The question is how quickly, but the answer may become clear when the Federal Reserve's policy committee meets this week.
When the Federal Open Market Committee (FOMC) concludes its two-day meeting on Wednesday, officials are widely expected to leave the central bank's key interest rate unchanged at its 22-year high, and attention will be focused on the Fed's announcement for clues as to whether it will cut rates at its next meeting in March.
As of late Tuesday, investors were all but certain the Fed would leave rates unchanged in January, but they were pricing in about a 44% chance of a rate cut at the next FOMC meeting in March, according to CME Group's FedWatch tool, which uses data from federal funds futures contracts to forecast interest rate movements.
If the Fed were to cut rates from their current range of 5.25% to 5.50%, it would put downward pressure on all borrowing costs across the economy. Interest rates on mortgages, credit cards, auto loans and business loans are all tied to the federal funds rate.
The Fed raised interest rates from pandemic-era near-zero levels starting in March 2022 to rein in borrowing and spending and tame surprisingly high inflation. With inflation approaching the Fed's 2% annual target, officials are preparing to stop squeezing the economy more tightly and have said they plan to cut the federal funds rate at some point but have not said when.
Today's high interest rates are hurting household finances. Expensive auto loans are pushing some buyers' monthly payments beyond $1,000. More people are falling behind on their credit card and auto loan payments, with card interest rates at record highs of over 21 percent. High mortgage interest rates have stalled the housing market, with first-time homebuyers unable to make payments and homeowners unwilling to sell and give up the low-interest homes they secured years ago when borrowing was cheaper.
On the bright side for savers, high interest rates mean banks are offering the highest yields on deposits in decades.
Meanwhile, data released on Friday suggested price pressures continued to ease in December despite rising incomes and spending, the latest sign that the Fed may have achieved a “soft landing” for the economy that seemed highly unlikely last year.
The FOMC statement and Fed Chairman Jerome Powell's press conference on Wednesday may offer some hints about the direction of interest rates, but definitive answers are not expected. Powell will likely say officials need to see upcoming economic reports before deciding to cut rates.
“We continue to expect the first rate cut in March, but we don't expect a strong signal in January,” Michael Gapen, U.S. economist at Bank of America Securities, said in a commentary last week. “The Fed needs to buy time to see more data.”