This year is expected to mark a turning point in the steady upward trend in interest rates, with consumers benefiting from lower borrowing costs.
The Federal Reserve has kept interest rates on hold in the 5.25% to 5.5% range since July, after raising the policy rate 11 times since March 2022, bringing it to a 22-year high. At its December 2023 meeting, the Fed expects to implement three quarter-point rate cuts in 2024, which could bring the federal funds rate down to a 4.5% to 4.75% range by the end of 2024.
Richard Wobbekind. (Photo by Cody Johnston/University of Colorado Boulder).
“The Fed will continue to rely on data to make decisions about when and how much to set the federal funds rate,” said Richard Wobbekind, associate dean for business and government relations and dean of business studies at the University of Leeds Business School. “The latest employment numbers, with wage inflation above 4 percent, seem to support maintaining stability through the first half of the year.”
The federal funds rate is a benchmark used by lenders to determine the cost of borrowing everything from auto loans and credit cards to mortgages, so a cut in interest rates for 2024 would be good news for consumers.
Still, interest rates are unlikely to return to the ultra-low levels of the 2010s, according to Sean Davis, associate professor of finance at the University of Leeds and research director at the Burr Ridge Centre for Finance.
“We have an entire generation that started their careers and their families knowing nothing but a low interest rate environment,” Davis said.
Current interest rates are relatively high compared to rates in the years following the 2008 global financial crisis and the early days of the COVID-19 pandemic. Given long-term indicators of the bond market, consumers should prepare for a period of sustainably higher interest rates, Davis said.
“We're going to have to get used to paying more on our consumer debt. We're going to have to pay more interest on our credit cards, more interest on our student loans, more interest on our mortgages, more interest on our car loans,” he said. “It's just going to make borrowing more expensive.”
Shawn Davis
The prospect of interest rates peaking has analysts and business leaders feeling more optimistic about the economy in 2024. Here's what it means for savers, investors, homebuyers, workers and consumers.
Saver
Rising interest rates have been good for savers because banks use the federal funds rate as a benchmark to set interest rates on savings products like certificates of deposit and money market accounts. If the Fed cuts rates in 2024, the annual percentage yield (APY) on these products could fall.
CDs offer savers a low-risk way to retain the attractive yields currently offered by banks — the highest of which are over 5.5% annualized.
“It might be advantageous to park your money in a CD account,” Davis says. “If you're guaranteed a 5.5% return next year in exchange for liquidity, that's pretty sweet. Especially if inflation is at 2% or 3%, that's a real return of over 2% that's really nice for essentially no risk.”
Investor
When interest rates fall, stock prices tend to rise, but a rate cut by the Fed is not set in stone and there are many unknowns.
“In addition to the obvious focus on job growth and wage and price inflation, the Fed needs to pay attention to other areas,” Wobbekind said. “Political and military tensions could cause supply chain disruptions. Additionally, commercial real estate refinancing and rising federal deficits could have significant effects on the banking system.”
If interest rates fall in 2024, bonds are likely to rebound, which could benefit those nearing or already in retirement.
“Pre-COVID, or even during COVID, if you held a bond portfolio, you were getting very little return from it and had to chase yield by buying riskier corporate bonds or using other strategies,” Davis says. “Now you can make decent returns, not just in nominal terms, but actually in real terms.”
Homeowners and Home Buyers
Homeowners with adjustable-rate mortgages could see their monthly payments drop if interest rates fall, while homebuyers could get the opportunity to lock in their mortgage at a lower interest rate.
“But if you're hoping for a 3.5% or 3% interest rate on a 30-year fixed-rate mortgage, that's unlikely,” Davis said.
Buyers may benefit from the increased supply of homes available this year, “so savings on monthly payments may come from lower purchase prices rather than from changes in interest rates,” Davis said.
Worker
Lower interest rates typically stimulate the economy and bode well for the labor market by encouraging businesses to invest more.
“Lower interest rates mean businesses can hire employees and invest in projects,” Davis said.
Still, there could be changes in the economy in 2024. “There are some things that are a little scary, like household savings dropping significantly after a surge in savings early in the pandemic. Credit card debt is also rising,” Davis said. “The economy has been very strong over the past year, but there are some signs that there are some things that are yet to materialize.”
consumer
Inflation may be slowing, but consumer goods are still expensive. And yet, consumers keep spending.
“The payoff is going to come when people realize they're overstretched,” Davis said. “The traditional liquidity channels that we've had for the last 16 years are now much more expensive. All debt is becoming more expensive, and I don't think consumers realize that they're already losing a lot of money.”
Davis doubted strong consumer spending would continue into 2024. “I think we're going to see a significant slowdown in consumer spending over the next 18 months to two years,” he said.
“Just because inflation has gone down doesn't mean prices have gone down, it just means prices aren't rising as rapidly, so I think consumers will start to cut back on more luxury expenses like travel and technology upgrades,” Davis said.
“Rate cuts may help ease the pain, but I don't think the pain is really being felt yet,” he added.