During the Federal Reserve’s final meeting of 2023 on Dec. 13, the Federal Open Market Committee (FOMC) announced interest rates would remain as is at least for now. Interest rates are currently at a 22-year record-high rate of 5.25 – 5.50 percent, up from nearly zero percent in March 2022 as the FOMC attempts to combat high inflation.
The last time the FOMC increased interest rates was at its July 2023 meeting, when interest rates rose by 25 percentage points to reach 5.25 – 5.50 percent, it was the highest interest rates had been for American consumers since 2001, and quickly increased the costs of credit card debt, auto loans and mortgages.
Inflation declined to 3.1 percent in November, down a tenth of a percent since October and down from 7.1 percent in November 2022, but inflation still remains above the Fed’s 2 percent target. Still, FOMC Chairman Jerome Powell noted that the Central Bank was more likely to lower interest rates in 2024 than raise them.
“It’s not likely we will hike again,” Fed Chair Jerome Powell said at a news conference, noting the Fed’s key rate is “at or near its peak.”
“You see that people are not writing down rate hikes: that’s us thinking that we have done enough,” Powell said.
While Fed policymakers did not want to take another rate hike off the table, it is no longer the central bank’s “base case,” he said. Powell noted the Central Bank would assess the economy and financial developments, among other factors, to determine “the extent of any additional (rate hikes) that may be appropriate to return inflation to 2 percent over time.”
The timing of rate cuts “is really the next question: that’s what people are thinking about, and talking about,” he said, with a “general expectation” that future meetings would feature such a discussion.
News of interest rate cuts was welcome news to many consumers, particularly those looking for a mortgage, auto loans, or paying off high-interest credit card debt.
Credit card interest rates today are more than 20 percent APR on average. Credit card interest rates had been closer to 14 to 16 percent the past few years, according to Fed data. But since 2022, averages have skyrocketed to more than 20 percent APR. For accounts with revolving debt balances, the average is even higher: around 22 percent.
Higher interest rates for credit cardholders often leads to an increase in credit card debt.
In August 2023, credit card debt balances exceeded $1 trillion, according to the Quarterly Report on Household Debt and Credit from the New York Fed, the highest level the survey has recorded. And it’s not just the debt that is rising; consumers are beginning to show increased signs of financial challenges with credit card delinquencies also rising. According to data from the Fed, more than 5 percent of credit card accounts are considered to be in “serious delinquency” of 90 days or more.
Interest Rate Cuts in 2024
In 2024 Fed policymakers estimated they’ll lower interest rates by three quarters of a percentage point, lowering the federal funds rate to a range of 4.5 percent to 4.75 percent. Analysts expect the interest rate cuts will come in the form of three quarter point cuts. The interest rate cuts are more than many economists expected but are lower than the full percentage point drop that markets anticipated.
Oftentimes the Fed will reduce interest rates to dig the economy out of a downturn such like with what happened with the pandemic. However, economists believe that in this case Federal officials will cut the interest rates in order to bring borrowing costs closer to normal as inflation begins to ease; otherwise inflation-adjusted rates would continue to rise.
“It’s really good to see the progress we’re making” on inflation, Powell said. “Inflation keeps coming down, the labor market keeps coming into balance. So far, so good.” But, he added, “It is far too early to declare victory and there are certainly risks.”
Some economists are optimistic that the Fed will cut interest rates faster than anticipated in 2024.
“We’re sticking to our view that the Fed will cut faster than this,” with 1.5 percentage points in decreases, starting in March or May, Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a note to clients. “We think inflation will fall faster than they expect.”
What happens to credit card interest rates when the Fed begins to lower interest rates? Do they get lowered for consumers as well?
The impact of a rate cut on credit card debt also depends on whether the credit card carries a fixed or variable rate. For consumers with fixed-rate credit cards, a rate cut usually results in no change. Many credit cards with variable rates are linked to the prime rate, so a federal funds rate cut will typically lead to lower interest charges.
“Typically, your credit card rate will move in tandem with Fed actions within a statement cycle or two,” said Ted Rossman, a senior industry analyst at Bankrate.
It is important to remember that even if a credit card carries a fixed rate, credit card companies can change interest rates whenever they want to, as long as they provide advanced notice (check your terms for the required notice).
While the reduction in interest rates can lead to savings on mortgages, auto loans, and credit card debt, when the Fed cuts interest rates, consumers usually earn less interest on their savings. Banks will typically lower rates paid on cash held in bank certificates of deposits (CDs), money market accounts, and regular savings accounts. The rate cut usually takes a few weeks to be reflected in bank rates.
The FOMC’s next meeting is scheduled for Jan. 30-31, 2024.