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The Federal Reserve’s aggressive and forceful measures to cool the most overheated economy in four decades may soon be coming to an end, according to the nation’s top economists.
More than half (or 53 percent) of experts polled for Bankrate’s First-Quarter Economic Indicator poll say the Fed’s key benchmark interest rate will peak in a target range of 5-5.25 percent, suggesting officials will likely only hike rates one more time.
But that doesn’t mean rate cuts are around the corner. More than four-fifths of economists (or 82 percent) say officials likely won’t begin cutting borrowing costs until 2024, even as the recent failure of the nation’s 16th largest bank risks worsening financial stability.
Both estimates are largely in line with fresh projections from officials in March. The Fed penciled in a 5-5.25 percent peak interest rate for 2023, after which officials see rates falling to 4.25-4.5 percent by the end of 2024.
The survey findings are notable because they suggest economists are still seeing eye-to-eye with policymakers on the U.S. central bank at a time when investors are starting to divulge. Market participants expect the Fed will lift rates one more time before turning around and reducing borrowing costs as soon as July, according to CME Group’s FedWatch.
Where borrowing costs end up has massive implications for consumers. Higher rates translate to more expensive mortgages, auto loans and credit cards, and they risk harming hiring and the economy. On the other hand, they make it an even more lucrative time to be a saver — who’ve already been seeing the highest savings yields in more than a decade thanks to the rapid run up in interest rates.
For individuals and households, this argues even more loudly for making emergency savings a high priority. Fortunately, returns on savings including certificates of deposit are the highest in 15 years.
— Mark Hamrick, senior economic analyst at Bankrate
Key takeaways:
Fed’s dilemma: How hot is inflation – really?
Nearly one-fifth (or 18 percent) of economists say the Fed will have to hike interest rates two more times — the second largest majority among respondents. Meanwhile, nearly an eighth (or 12 percent) say the Fed has three more rate hikes. Just 6 percent say the Fed is already done raising interest rates.
“The Fed has a hammer, so everything must be treated as a nail,” says Bill Dunkelberg, chief economist at the National Federation of Independent Businesses.
The Fed’s rate path depends on what happens with inflation. Consumer prices have likely already peaked, with inflation falling to 6 percent in February after soaring as high as 9.1 percent last June. Yet, price pressures to start the year haven’t been cooling as quickly as they were just three months ago.
Just 18 percent of economists said the Fed could cut rates this year, down sharply from 38 percent in the fourth-quarter poll.
The economists who do project rate cuts point to how much data can lag behind what’s happening within the U.S. economy. Rent prices, for example, have mounted a continuous surge since early 2021, with those costs most recently rising 8.8 percent in February from a year ago. Shelter accounted for more than 70 percent of February’s increase, according to the report, even as real-time measures show new lease prices are falling. The reason for the delay is by design: Leases roll over only once a year, meaning they aren’t immediately reflected in the index.
Recent bank failures could also dampen consumer spending and business investment, as financial institutions offer fewer loans to retain enough money on hand to cover their customers’ needs.
All of those factors could cause prices to quickly decelerate, suggesting the Fed doesn’t have to be so aggressive by keeping rates at their decade-plus high.
Even so, inflation is currently coming from so-called “stickier” components, meaning prices that change relatively slowly, according to an analysis from the Atlanta Fed. The Fed’s preferred way of measuring inflation — based on the Department of Commerce’s personal consumption expenditures (PCE) index, which already tracks lower than the Labor Department’s consumer price index (CPI) — is seen as moderating to 3.3 percent by the end of 2023.
Fed officials have reiterated they’re more worried about pulling back too soon — leading to elevated inflation for longer — than they are about overshooting on interest rates and raising borrowing costs too much.
“It’s unlikely that inflation will reach the Fed’s 2 percent target in 2023,” says Odeta Kushi, deputy chief economist at First American Financial Corp. “As such — barring any major recession or unforeseen economic shock — the Fed is unlikely to cut rates until at least 2024.”
Hear from the experts
The Fed is unlikely to cut rates until 2024 or later due to the need to assess the lagged impact of the prior rate increases. The tradeoffs between stabilizing and reducing inflation versus mitigating the decline in economic growth and job losses will become more evident as the markets digest the rate increases.
— Nayantara Hensel, chief economist, Seaborne Defense
2023 [for rate cuts] is too soon. Even if the economy got very weak quickly, inflation would be too high to enable a cut. Markets have been too eager for the Fed to not hike, to stop hiking, to cut rates and have been repeatedly wrong. Maybe these have been bets on banking sector problems welling up and stopping the Fed, or maybe it was just ‘something in the water.’ I view market prices as peculiar.
— Robert Brusca, chief economist at Fact And Opinion Economics
We continue to assume that the Fed tightens by 25 basis points at both the May and June FOMC meetings, on the assumption that the worst of the banking sector crisis is behind us, and as the various year-over-year inflation gauges remain well above 2 percent.
— Mike Englund, chief economist at Action Economics
The First-Quarter 2022 Bankrate Economic Indicator Survey of economists was conducted March 23-30. Survey requests were emailed to economists nationwide, and responses were submitted voluntarily online. Responding were: Odeta Kushi, deputy chief economist, First American Financial Corporation; Yelena Maleyev, economist, KPMG; Scott Anderson, chief economist, Bank of the West; Nayantara Hensel, Ph.D., chief economist, Seaborne Defense; Joel L. Naroff, Naroff Economics; Mike Fratantoni, chief economist, Mortgage Bankers Association; Robert Frick, corporate economist, Navy Federal Credit Union; John E. Silvia, CEO and founder, Dynamic Economic Strategy; Dante DeAntonio, director of economic research, Moody’s Analytics; Bernard Markstein, president and chief economist, Markstein Advisors; Lawrence Yun, chief economist, National Association of Realtors; Robert Brusca, chief economist, Fact and Opinion Economics; Bill Dunkelberg, chief economist, NFIB; Gregory Daco, chief economist, EY; Lindsey Piegza, Ph.D., chief economist, Stifel; Eugenio J. Alemán, Ph.D., chief economist, Raymond James Financial; and Mike Englund, chief economist, Action Economics.
FAQs
Both estimates are largely in line with fresh projections from officials in March. The Fed penciled in a 5-5.25 percent peak interest rate for 2023, after which officials see rates falling to 4.25-4.5 percent by the end of 2024.
What is the interest rate prediction for 2023? ›
While it expects the Fed to continue increasing rates to tame inflation, it believes that long-term rates have already peaked. “We expect that 30-year mortgage rates will end 2023 at 5.2%,” the organization noted in its forecast commentary.
Will Fed continue to raise rates in 2023? ›
The Fed raises interest rates again in what could be its final attack on inflation. Federal Reserve Chair Jerome Powell speaks during a news conference at the Federal Reserve in Washington, D.C, on March 22, 2023. The Fed raised interest rates again Wednesday but signalled it may be the last hike for a while.
What the Fed rate hike means for you? ›
The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.
What is the interest rate prediction for 2025? ›
An interest rate forecast by Trading Economics, as of 12 May, predicted that the Fed Funds Rate could hit 5.25% by the end of this quarter - a forecast that has been materialised. The rate is then predicted to fall back to 3.75% in 2024 and 3.25% in 2025, according to our econometric models.
How many Fed rate hikes are expected in 2023? ›
United States Federal Reserve building, Washington D.C. The Federal Reserve will hike interest rates just one more time in 2023 before the central bank ends its inflation battle, according to its median forecast released Wednesday.
What will interest rates be in 2023 2024? ›
Direct Loan Interest Rates for 2023-2024
| Loan Type | 10-Year Treasury Note High Yield | Fixed Interest Rate |
|---|
| Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students | 3.448% | 5.50% |
| Direct Unsubsidized Loans for Graduate and Professional Students | 3.448% | 7.05% |
1 more rowMay 16, 2023
Fannie Mae, Mortgage Bankers Association and National Association of Realtors expect mortgage rates to drop through the first quarter of 2024, by half a percentage point to about nine-tenths of a percentage point. Figures are the predicted quarterly average rates for the 30-year fixed-rate mortgage.
Where are interest rates going in the next 5 years? ›
The predictions made by the various analysts and banks provide insight into what the financial markets anticipate for interest rates over the next few years. Based on recent data, Trading Economics predicts a rise to 5% in 2023 before falling back down to 4.25% in 2024 and 3.25% in 2025.
What will the Fed interest rate be at the end of 2023? ›
When will the Fed stop hiking rates? Rates may be near that level now. Economists have long expected the Fed would likely stop raising interest rates at some point in 2023, but “where” rates peak — a level known as the “terminal” rate — is actually more important than “when.”
How long will interest rates stay high for? ›
'I believe by the end of 2023 we will see rates start to fall with a target of between 2.5 to 3 per cent in 2024. 'I believe if the base rate can get back to circa 2.5 per cent, then we will see rates hovering around that mark with a return to products that have not been seen in the mortgage industry for some time.'
Who benefits from Fed rate hike? ›
The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.
Is a Fed rate hike good or bad? ›
When interest rates rise, it's usually good news for banking sector profits since they can earn more money on the dollars that they loan out. But for the rest of the global business sector, a rate hike carves into profitability. That's because the cost of capital required to expand goes higher.
Is Fed rate hike good for stocks? ›
As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down.
How high could interest rates rise in 2023? ›
Rates will keep rising in 2023
In December, the FOMC projected that the median Federal Funds Rate (FFR) in 2023 would be 4.6 percent. This projection was revised in March, with the FOMC projecting the FRR to hoover between 5.1 and 5.6 percent in 2021.
Where will interest rates be in 2027? ›
Interest Rates for 2021 to 2027. CBO projects that the interest rates on 3-month Treasury bills and 10-year Treasury notes will average 2.8 percent and 3.6 percent, respectively, during the 2021–2027 period. The federal funds rate is projected to average 3.1 percent.
What is the future of Fed rate hikes? ›
Although consumer price increases have softened since then, a “core” measure that strips out volatile food and energy items has climbed more than expected this year. That prompted futures markets to predict the Fed would lift rates as high as 5.6% in 2023.
Do we think interest rates will go down in 2023? ›
When it becomes more attractive to save money, consumers tend to spend less of it. But the Fed isn't done fighting inflation. And because of that, consumers should not expect interest rates to drop in 2023. However, rates may also not climb much from where they are today.
Will mortgage rates ever go back to 3 percent? ›
“Returning to mortgage rates of 3% or 4% is not going to happen, in my view,” says Yun, who points out that historically rates have been higher. The low rates of 2020 and 2021 were “unique” and those that got them were “lucky,” he says.
In December of 2022, the Fed indicated that it expects the funds rate to fall to 4.1% by the end of 2024 after reaching the 5.1% mark by the end of 2023. If that holds true and the federal interest rate begins to fall, auto loan rates should start to drop shortly after.
When was the last time interest rates were 5? ›
Mortgage rates steadily declined from 8.05% in 2000 to the high-5% range in 2003.
How high is the prime rate expected to go? ›
Basic Info. US Prime Rate Forecast is at 5.76%, compared to 5.76% last quarter and 5.75% last year. This is lower than the long term average of 5.82%.
What is the date of the next Federal Reserve meeting 2023? ›
The Fed - May 2-3, 2023 FOMC Meeting.
Does raising interest rates lower inflation? ›
Higher interest rates are generally a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy.
Will CD rates go up? ›
According to Bankrate, by the end of 2023, the national average for one-year CDs is estimated to increase to 1.8% up from 1.38% at the end of 2022. Further, the national average for five-year CDs will reach 1.5% by the end of this year, with some of the highest-yielding accounts offering rates of 4.1%.
Where does money go when Fed raises rates? ›
What Happens When the Fed Raises Rates? When the Fed raises the federal funds target rate, the goal is to increase the cost of credit throughout the economy. Higher interest rates make loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments.
Who gets the extra money when interest rates rise? ›
“The winners tend to be people who have high savings, and obviously benefit from high interest rates,” Oliver says. “The losers tend to be those with net debt. Those with more net debt tend to suffer because they pay more on interest rates servicing that debt.
How do you profit from rising interest rates? ›
To profit from rising interest rates, there are several strategies that investors can consider. These include investing in fixed-income securities with short durations, dividend-paying stocks, and sectors that tend to perform well in a rising interest-rate environment.
Do stocks do well when interest rates rise? ›
“If interest rates move higher, stock investors become more reluctant to bid up stock prices because the value of future earnings looks less attractive versus bonds that pay more competitive yields today,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
Relationship between interest rates and stock prices
Historical observation has shown that stock prices and interest rates have an inverse relationship, meaning as interest rates rise, stock prices tend to move lower.
How will Fed rate hike affect me? ›
The most recent Fed rate hike means that borrowers will continue to see higher interest rates on mortgages, credit cards and personal loans. On the flip side, as interest rates remain high, you can benefit from boosted earnings on your savings. "The Fed rate hike can lead to higher returns on savings accounts.
Will the stock market go down if the Fed raises interest rates? ›
As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down.
What happens to gold prices when interest rates rise? ›
So, while rising interest rates may increase the U.S. dollar, pushing gold prices lower (because gold is denominated in U.S. dollars), factors such as equity prices and volatility coupled with general supply and demand are the real drivers of the price of gold.
Will interest rates change in 2024? ›
These organizations predict that mortgage rates will decline through the first quarter of 2024. Fannie Mae, Mortgage Bankers Association and National Association of Realtors expect mortgage rates to drop through the first quarter of 2024, by half a percentage point to about nine-tenths of a percentage point.
What will the Fed funds rate be at the end of 2023? ›
We project a year-end 2023 federal-funds rate of 4.75%, falling below 2.00% by mid-2025. That will help drive the 10-year Treasury yield down to 2.25% in 2025 from an average of 3.5% in 2023. We expect the 30-year mortgage rate to fall from an average 6.25% in 2025 to 4% in 2025. 2) Inflation forecast.
Will mortgage rates go back down in 2024? ›
"Possibly in 2024, but it will depend on the Fed's decisions about raising rates in the second half of the year," says Fleming. "And even if they do go down, it won't be back to the rates of yesteryear. 6% mortgage rates used to be normal, and that's more reasonable to expect too."
Where will mortgage rates be at the end of 2024? ›
30-Year Mortgage Rate forecast for December 2024. Maximum interest rate 6.08%, minimum 5.57%. The average for the month 5.78%. The 30-Year Mortgage Rate forecast at the end of the month 5.90%.
How long will interest rates stay high? ›
'I believe by the end of 2023 we will see rates start to fall with a target of between 2.5 to 3 per cent in 2024. 'I believe if the base rate can get back to circa 2.5 per cent, then we will see rates hovering around that mark with a return to products that have not been seen in the mortgage industry for some time.'
What will the Federal Reserve prime rate be in 2023? ›
Historical Prime Rate
| Effective Date | Rate |
|---|
| 5/4/2023 | 8.25% |
| 3/23/2023 | 8.00% |
| 2/2/2023 | 7.75% |
| 12/15/2022 | 7.50% |
20 more rowsBankrate Chief Financial Analyst Greg McBride, CFA, says to expect top-yielding savings and money market rates to hit 5.5% annual percentage yield (APY) in the middle of 2023, reaching 2007 levels. He also expects those yields to end the year at around 5.25% APY. Both top yields are for nationally available accounts.
