How Low Will Interest Rates Go? Experts Predict the Fed's Upcoming Cut
The Federal Reserve is all but guaranteed to bring about a long-awaited interest rate cut during its next meeting as economic data continues to point to slowing inflation and a weakening jobs market. But just how big will that rate cut be?
The central bank held interest rates steady in July — a move that was expected and kept rates at the 5.25% to 5.5% range. But Fed Chair Jerome Powell said at the time that the first rate cut since the early days of the COVID-19 pandemic could be coming as soon as the next Federal Open Market Committee (FOMC) meeting Sept. 17-18.
Powell doubled down in a speech last week when he said the "time has come" to adjust policy in support of the Fed's two economic mandates of keeping prices stable and the labor market strong.
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View Rates"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," Powell said.
When the Fed does move rates, they usually choose to do so in 25 basis-point increments. But it has been known to make larger changes, like when it cut rates by half a percentage point and then a full percentage point in March 2020. Recent events spurred onlookers to consider the possibility of a more dramatic cut again in coming months.
What will the Fed do about interest rates in September?
After a disappointing July jobs report and a stock market sell-off at the start of August, some on Wall Street called for more dramatic action from the Federal Reserve via an emergency mid-meeting rate cut or larger rate cut in September.
Most of those calls calmed down after markets recovered from the early August volatility. Only four major brokerages are predicting a 50-basis-point cut, compared with the nine that are predicting the 25-basis-point cut, according to Reuters.
As of Friday, the CME Group's FedWatch Tool shows a 69.5% chance of a 25-basis-point cut in September. That's changed from two weeks ago, when investors showed a pretty even split between the possibility of a 50-basis-point cut and a 25-basis-point cut.
Loretta Mester, who served as president of the Federal Reserve Bank of Cleveland until earlier this year, told CNBC Tuesday that while a 50-basis-point cut was not out of the question, she thinks the central bank will try to avoid a larger cut, because it might signal that officials waited too long to cut rates.
"It would signal that they think they're a little bit behind the curve... and I don't think they're behind the curve," she said. She expects the Fed to act "very deliberately" as it brings its benchmark rate back down. "In my read, that would be 25 basis points and a series of 25 basis points would be appropriate at this point given where the economy is."
That final caveat is key — momentum could shift back in the direction of a larger rate cut if August's jobs numbers, which come out Sept. 6, are weaker than expected.
What will happen to rates after September?
The FOMC will meet two more times after September this year — in November and December — and next month’s likely rate cut is expected to be the first of several, though forecasts vary about the pace of the cuts.
Investment firm Vanguard wrote in a note published last week that after a 25-basis-point cut in September, it anticipates one more reduction of the same size this year.
About a third of the 101 economists polled by Reuters earlier this month agreed, saying they think there will be two cuts before the end of 2024. More than half of those polled (54%) expect there to be three cuts this year, or one at every remaining FOMC meeting.
Meanwhile, interest rate futures signal a 48% chance that the Fed will cut interest rates to the 4.75% to 5% range in November, and a 45% chance that rates will come down to the 4.25% to 4.5% at the December meeting, according to CME Group’s tool.
What interest rate cuts mean for consumers
The federal funds rate — which is the benchmark interest rate figure that the Fed makes decisions about at its FOMC meeting — determines the rate at which banks lend money to one another overnight. A trickle-down effect means that changes to the federal funds rate can influence how expensive it is to borrow money for consumers, and how much interest you can earn in savings accounts.
Generally, when interest rates get cut, mortgage rates come down as well. Rates could also drop for auto loans, personal loans and student loans, depending on the type of loan. And of course, when rates fall, you may have the chance to lower your monthly payments by refinancing mortgages and other loans.
The cost of borrowing money via a credit card could also decrease, but these annual percentage rates (APRs) are always high, and financial advisors tend to recommend prioritizing paying off credit card balances regardless of the broader rate environment.
But rate cuts also mean lower savings rates. In recent years, consumers have gotten used to annual percentage yields (APYs) of around 5% on high-yield savings accounts. Banks tend to follow in the path of the Fed, which means that those rates will likely come down as the federal funds rate does. (However, with the Fed only expected to cut rates by 25 to 50 basis points in September, there’s still time to take advantage of the high yields).
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