How Far Away Are Lower Interest Rates? Fed Meeting Next Week May Provide Clues

Lower interest rates are on the way. The question is how soon, and next week’s meeting of the Federal Reserve’s policy committee may shed light on an answer.

With officials widely expected to hold the central bank’s key interest rate steady at its 22-year high at their meeting next Wednesday, all eyes will be on the Fed’s communications for clues about whether they will cut that rate at their next meeting in March. 

As of Friday, investors were almost certain that the Fed will hold the rate steady in January, but are nearly evenly split on what will happen at the following meeting in March, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

Should Fed officials lower the rate from its current range of 5.25%-5.50%, it would put downward pressure on all kinds of borrowing costs throughout the economy. Interest rates on mortgages, credit cards, auto loans and business loans are all tied to the fed funds rate.

The Fed ratcheted the rate up from its pandemic-era level of near zero starting in March 2022 to quash alarmingly high inflation by discouraging borrowing and spending. With inflation now having simmered down close to the Fed’s goal of a 2% annual pace, officials have said they’re preparing to stop squeezing the economy so hard and plan to lower the fed funds rate at some point, but haven’t said when.

The current high interest rates are taking a toll on household finances. Pricey car loans have pushed monthly payments to more than $1,000 for some buyers. More people are falling behind on credit card and auto loan payments, with card interest at a record high of more than 21%. High mortgage rates have put the housing market into a state of deadlock, with first-time buyers unable to afford payments, and homeowners unwilling to sell and abandon the lower payments they secured years ago when borrowing was cheap.

On the bright side for savers, high rates have meant banks have been offering the highest returns on deposits in decades.

Meantime, data released Friday that shows price pressures continued to moderate in December even as income and spending rose provide the latest indication that the Fed may have pulled off a “soft landing” for the economy, which seemed highly unlikely last year.

While the Federal Open Market Committee’s statement and Fed Chair Jerome Powell’s press conference Wednesday may provide some hints about the path of interest rates, don’t expect any definitive answers. Powell will likely say that officials need to look at forthcoming economic reports before deciding to cut rates.

“We continue to expect the first rate cut in March, though we expect no strong signal in January,”  Michael Gapen, U.S. economist at Bank of America Securities wrote in a commentary. “The Fed needs to buy time to see more data.”