The Federal Reserve voted to hold interest rates steady at their current range of 5.25 to 5.5 percent, a 23-year high during its June 2024 meeting, and revised its outlook for rate cuts from three to just one in 2024. 

That means Americans will keep paying higher mortgage, credit card, auto loan and other higher interest rates for the foreseeable future, but also continue to benefit from higher savings account yields.

The Fed’s decision to leave interest rates as is came after reviewing the Consumer Price Index (CPI) inflation report for May 2024, which found that after price increases accelerated in the first quarter of 2024, prices were starting to cool, just not fast enough for the Central Bank. 

Inflation overall was flat in May and a core price measure that excludes volatile food and energy items rose 0.2 percent, nudging down the annual increase to 3.4 percent from 3.6 percent the previous month, according to the CPI.

Federal Reserve Chair Jerome Powell noted that there has been “modest further progress” toward the Fed’s 2 percent inflation objective, but said the Central Bank does not yet have the confidence to cut rates, even as inflation has eased from its peak levels.

Interest rates are the main tool the Fed uses to combat inflation. High rates make borrowing more expensive, which slows spending and the economy, generally easing overall price hikes. Rate cuts lower borrowing costs for consumers, stimulating the economy, and juice the stock market. 

“We see today’s report as progress and building confidence,” Powell said. “This is a step in the right direction but it really is only one reading.” He added, “We hope we get more like it.”

Despite the change in the Fed’s outlook, some economists still believe the Fed will trim rates twice this year at one of its remaining scheduled meetings:

• July 30-31 
• Sept. 17-18 
• Nov. 6-7 
• Dec. 17-18 

“Overall, there’s nothing here that rules out a September rate cut,” Paul Ashworth of Capital Economics wrote in a note to clients. “It all depends on the incoming data. If employment growth edges down again and the May price data prove to be the start of a renewed disinflationary trend, as we expect, then two rate cuts this year is still the most likely outcome.”

Inflation & Interest Rate Hikes

Since March 2022, the Federal Reserve has hiked the federal funds rate 11 times from near zero to its current high of 5.25 – 5.50 percent, where it has been since July 2023. 

In March 2024, the Fed estimated it would not raise rates in 2024, but would instead reduce rates by at least a quarter of a percentage point three times this year. 

However officials now estimate that instead of three rate cuts projected this year, the Fed will lower the federal funds rate by a quarter of a percentage point to a range of 5 to 5.25 percent, most likely in September.

Officials also expect four rate cuts next year in 2025 and another four in 2026, more than they previously anticipated, in order to lower interest rates to 3.1 percent by the end of 2026, the goal outlined in the Fed’s March 2024 forecast.

The last time the Fed actually cut interest rates was in March 2020, at the peak of the pandemic. 

In an emergency meeting on March 14 and 15, 2020, the Fed moved to trim its target rate by a full percentage point, from a range of 1 – 1.25 percent to a range of 0 – 0.25 percent: Effectively, zero. 

The next time the Fed acted on interest rates was two years later, almost to the day, in a meeting on March 15 and 16, 2022. Worried about rising inflation, the panel ordered a quarter-point increase, to a target range of 0.25 percent to 0.50 percent.

Around July 2022, inflation hit a 40-year high of 9.1 percent. 

Between March 2022 and July 2023, the Fed increased interest rates by five full points, setting them at their current level of 5.25 – 5.50 percent in order to lower inflation. However the annual inflation rate seems to be stalled in the range of 3 to 3.5 percent, which is higher than the 2 percent rate the Federal Reserve has set as a goal.

In a statement after its June 2024 two-day meeting, the central bank acknowledged inflation is getting closer to its 2 percent target, but reiterated it will not be “appropriate to reduce the target range until it has gained greater confidence that inflation (now running about 3 percent to 3.5 percent) is moving sustainably toward” the Fed’s 2 percent goal.

Leaning on Credit Cards to Make Ends Meet

To safeguard consumer purchasing power, experts say, the Fed needs to stay focused on lowering inflation.

“The average person is going through hell,” said David Lynd, chief executive at real estate company The Lynd Company. “Inflation is ravaging the consumer. They’re out of money, used up their credit cards, borrowing from mom and dad. There’s not a lot left with inflation not going down.”

“There’s no question that people are leaning more on their cards to help them as prices continue to rise,” said Matt Schulz, LendingTree credit analyst.

Credit card interest rates are still climbing, even without the Fed increasing interest rates. The average annual percentage rate (ARP) on a new card in June notched the biggest monthly increase since November, rising to 24.80 percent, LendingTree said. 

“Consumers need to understand that the cavalry isn’t coming anytime soon, so the best thing you can do is take things into your own hands when it comes to lowering credit card interest rates,” Schulz said.

According to LendingTree credit analyst Matt Schulz, options include:  

• Nonprofit consumer credit counseling 
• Asking your card issuer for a lower rate 
• Shopping around for the lowest rates and best deals 
• Getting a credit card with 0 percent interest on balance transfers and purchases 
• Consolidating debts with a low-interest personal loan 

Federal Reserve Keeps Interest At 23-Year High For Foreseeable Future

In April 2024, inflation showed signs of softening but at a slower pace than expected. May’s CPI report showed further progress: Auto insurance, which had been surging, dipped and airline fares fell 3.6 percent. Unfortunately rent, the chief inflation driver, kept rising. 

Yes, you read that correctly.

One of the “uncontrollable” inflation components is rent, which remains high and accounts for about one-third of the consumer price index, said Stephen Bittel, founder and chairman of Terranova Corporation, an alternative investment firm specializing in commercial real estate.

Last month, at a conference in Amsterdam, Fed Chair Jerome Powell called housing inflation “a bit of a puzzle,” noting that data measuring new apartment leases showed rents barely increasing.

Economists expect cost increases for rent, auto insurance, and healthcare to decrease in the months, but it’s uncertain how rapidly that will play out. 

Jim Parrott is co-owner of Parrott Ryan Advisors and a nonresident fellow at the Urban Institute. Mark Zandi is chief economist of Moody’s Analytics. In an OpEd for The Washington Post, Parrott and Zandi argued that the Fed’s insistence on keeping rates higher is “based on a serious misjudgment of the role the cost of owning a home plays in inflation and threatens to do unnecessary harm to the economy.”

Parrott and Zandi opined that the Fed is “relying heavily on an ill-conceived notion of the cost of homeownership,” explaining the Fed “attempts to capture the cost of homeownership by estimating the rent a homeowner would pay for a similar home nearby,” but notes this is problematic for two critical reasons.

1. Using this rental equivalent approach badly miscalculates the actual cost of owning a home as the vast majority of American homeowners either don’t have a mortgage or have the same fixed-rate mortgage they had last year, and are paying similar housing costs. Yet their implicit rent has gone up along with that of actual renters.
2. There simply isn’t enough inventory to determine comparable rents, especially during a nationwide housing shortage. This breakdown in the housing supply pipeline is lifting the cost of buying and renting, driving up the very measure of inflation on which the Fed is relying. 

“Because of these and other challenges in measuring the cost of homeownership, most developed countries treat owner-occupied housing as an investment and exclude it from their inflation estimates,” said Parrott and Zandi. “Yet, in the United States, it’s given more weight than any other good or service tracked in the two preferred measures of inflation.”

“If the Fed followed the sensible lead of the rest of the developed world and removed this variable from its measures, it would find that inflation is right on its target at 2 percent. Indeed, it has been there since last fall,” the OpEd said.

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