Key takeaways

  • The Federal Reserve has most likely completed its most aggressive rate-hiking campaign in four decades, bringing interest rates to a 23-year high of 5.25-5.5 percent after 11 rate hikes.
  • After focusing on inflation for the past two years, Fed officials may start to shift their focus to minimizing harm to the job market, with unemployment edging up and the economy normalizing.
  • Consumers can take advantage of higher interest rates by eliminating high-cost, variable-rate debt, boosting their emergency savings and locking in long-term CDs.

For the Federal Reserve’s most aggressive rate-hiking campaign in four decades, 11 times may actually be the charm.

Not a single official on the Federal Open Market Committee (FOMC) expects that the U.S. central bank’s most forceful inflation fight in 40 years will require another rate hike, according to projections released along with the Fed’s March rate decision. The sentiment points to the likelihood that the Fed’s key borrowing benchmark peaked when it smashed a 23-year high of 5.25-5.5 percent.

Fed officials appear confident that interest rates are putting enough force on the economy to eventually deflate red-hot inflation, even as two months of hotter-than-expected data reveal that prices are still climbing at an outsized pace on key household essentials — from housing to insurance.

“They haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2 percent,” Fed Chair Jerome Powell said at the Fed’s March post-meeting press conference, referring to the hotter data.

If borrowing costs go anywhere else from here, they’re most likely to head down — not up. Officials will likely have enough confidence that inflation is retreating to begin cutting interest rates at some point this year, Powell added at the March gathering. The Fed’s latest projections also showed that 17 of the Fed’s 19 officials continued to expect that they’d cut rates at least once this year. The median estimate penciled in three rate cuts worth 0.75 percentage point, matching the Fed’s last update in December.

Every indication is that the Federal Reserve is done raising interest rates. How long interest rates remain at these levels and how much the Fed cuts interest rates are the key questions for 2024. — Greg McBride, Bankrate Chief Financial Analyst

The bar for another rate hike may be even higher than a rate cut, economists say

At the same time, Powell is stressing that the Fed’s future moves haven’t been determined yet. Just as officials would be prepared to reduce rates faster if the economy took a turn, policymakers would also reevaluate their rate path if inflation proved more challenging to defeat.

But signaling that rate hikes are over is a hard statement to take back. Markets have been on a tear since the Fed first revealed that it’s likely finished, with the S&P 500 crushing 19 record highs so far in 2024. Investors are likely already pricing in the likelihood of lower interest rates, fueling the optimism even more. Market participants’ baseline outlook is also for three rate cuts in 2024, CME Group’s FedWatch tool shows.

To be sure, economists have long expected that the Fed was most likely done. Morgan Stanley, Capital Economics and Moody’s Analytics were among Wall Street’s most prominent firms projecting as early as last fall that the Fed wouldn’t need to raise borrowing costs anymore. That was even after Fed officials in September suggested that one more increase was on the table.

But it’s the Fed’s conviction about being done with rate hikes that’s surprised experts most, knowing investors are bound to get ahead of the U.S. central bank. At the start of the year, investors were projecting that the Fed would cut interest rates seven total times in 2024.

“Unless we see a meaningful back-up in inflation — not just a lack of improvement — the Fed is indefinitely on the sidelines,” says Lindsey Piegza, chief economist at Stifel Financial. “The committee has clearly capitulated. They would lose a lot of credibility, on top of the mistakes that they made at the front end of the cycle by holding onto transitory and crisis-level accommodation well beyond what was appropriate.”

The Fed is juggling sticky inflation with a slowing labor market

That’s not to say that inflation has been easy to wrestle lately. Prices in February rose 3.2 percent from a year ago, major improvement from the eye-catching 9.1 percent peak in June 2022, Bureau of Labor Statistics data shows. But important to officials is whether those trends continue. On a month-ago basis, consumer inflation heated up the most in six months. If the past three months of inflation continued for a full year, the inflation rate would bounce back up to 3.9 percent. Excluding food and energy, prices would rise 4.1 percent — three-tenths of a percentage point higher than its current level (3.8 percent).

Powell has said Fed officials won’t react to two months of stronger data, just as they didn’t declare “mission accomplished” when inflation slowed more than expected at the end of 2023. Rather, officials want to see more data confirming that inflation is continuing to move in the right direction. The Fed is bound to cut before price pressures officially hits its goalpost of 2 percent, Powell said in March.

But another wrinkle officials are juggling: A slowing labor market. Unemployment has been holding below 4 percent for the longest stretch of time since the 1960s but has recently started creeping up, hitting a two-year high of 3.9 percent in February. The share of workers who are voluntarily quitting their positions has rebounded back to pre-pandemic levels, a sign of a rebalancing labor market. Meanwhile, last year’s growing labor force — one factor that helped the job market boom without triggering more inflation — isn’t expected to last forever.

The broader financial system is normalizing, too. Department of Commerce data is expected to show that the U.S. economy grew a healthy 2.1 percent in the first three months of 2024, the Atlanta Fed’s GDPNow tracker shows. Those gains, however, could diminish, especially as consumers’ spending habits catch up to higher rates and ballooning credit card debt. Retail sales rebounded in February but only after slumping the most in almost a year in January, Census data shows.

Fed officials have a dual mandate: stable prices and maximum employment. After spending the past two years hyper-focused on inflation, slowing inflation helps give the Fed room to prioritize minimizing harm to the job market. Not to mention, slower spending and a weaker labor market would also weigh on inflation.

But a nightmare scenario for the Fed — and consumers — might be an environment where unemployment edges up, while inflation stays sticky, giving Fed officials a reason not to move in either direction.

“Inflation may be sticky, but labor market and consumer indicators point to a slowdown in growth already occurring,” says Lauren Goodwin, economist and chief market strategist at New York Life Investments. “The ‘goldilocks’ mix of stable growth and disinflation is moving past us.”

What Fed officials are currently saying about the economy

It’s going to be a bumpy ride. Now, here are some bumps, and the question is: Are they more than bumps?… We’re not going to overreact to these two months of data, but we’re not going to ignore them. — Jerome Powell, Federal Reserve Chairman
We’re in this murky period where we’ve got to strike a balance of the dual mandate. — Austan Goolsbee, Chicago Fed President
The economy continues to deliver surprises and it continues to be more resilient and more energized than I had forecast or projected. And so as a consequence, I’ve sort of re-calibrated when I think it’s appropriate to move. — Raphael Bostic, Atlanta Fed President

If the Fed is done raising interest rates, these are the most important steps to take with your money

The Fed’s decisions impact almost every financial decision you make. Consumers see higher rates reflected on their credit card statements, personal loan financing costs, auto loan rates and more. And even if the Fed is done raising borrowing costs, it does little to erase the pain of higher interest rates, which are unlikely to be as cheap as they were during the pandemic-era anytime soon.

1. Eliminate high-cost, variable-rate debt

Americans are more vulnerable to higher interest rates if they have a variable-rate loan, especially if it’s debt on a high-interest credit card. The average credit card rate is hovering at the highest levels ever recorded, most recently 20.75 percent, thanks to the Fed’s inflation fight, according to Bankrate data.

Calculate whether transferring that debt to a balance-transfer card can help you save money in the long run. Often, it involves paying a fee, but you may end up saving money on interest and speeding up your repayment if you can take advantage of a 0 percent introductory annual percentage rate (APR). Currently, offers on Bankrate last for as long as 21 months.

Meanwhile, homeowners who locked in a mortgage in the past year when the 30-year fixed rate was surging may want to keep an eye on rates for potential refinancing opportunities. In his annual interest rate forecast for 2024, McBride expects that the key rate will fall to 5.75 percent by the end of the year. Utilize Bankrate’s mortgage refinance calculator to help you estimate how much money refinancing might save you in the long run — and how long it might take for you to breakeven.

2. Boost your emergency savings

Uncertainty underscores the importance of finding ways to boost your emergency savings. Financial experts’ typical rule of thumb recommends that Americans have anywhere between six to nine months’ worth of expenses stashed away.

The one silver-lining to rising rates: The best yields in over a decade can even help savers grow their rainy-day fund even quicker — and also grow their purchasing power. All 10 banks ranked for Bankrate’s best high-yield savings accounts for March are offering yields higher than headline inflation.

3. Lock in a long-term CD

If you already have an emergency fund, consider locking in those elevated yields by opening a 2-year or 5-year certificate of deposit (CD). Savings account yields are variable, and banks can trim those offers long before the Fed reduces its own benchmark.

4. Keep the course with your retirement contributions

Investors are in for a rude awakening if the Fed doesn’t cut borrowing costs as much as they expect — or as quickly. Hawkish Fed surprises could lead to more market volatility, but it shouldn’t matter to the long-term investor with a diversified portfolio. Stay the course with your retirement contributions and see any downdraft in the market as an important buying opportunity.

“At some point, the market is going to have to come to the Fed, or the Fed is going to come to the market,” says Mark Fleming, chief economist at First American Financial Corporation. “The forecast is one thing. The reality is another.”