Key points
- The Federal Reserve has been raising interest rates to cool inflation.
- Because inflation is still higher than where the central bank wants it to be, we may not see a reduction in interest rates anytime soon.
- However, rates may not climb so much from where they are today.
Inflation has been wreaking havoc on consumers since the latter part of 2021, and the Federal Reserve has been doing its best to fight it. To that end, the central bank has raised interest rates nine times since early 2022. Those rate hikes have driven up the cost of borrowing, forcing consumers to pay more for everything from personal loans to auto loans to credit card balances.
See, the Fed needs consumer spending to slow down in order for inflation to cool. Inflation is generally the byproduct of an excess of consumer demand relative to supply. A good way to narrow that gap is to push consumers to spend less.
Rate hikes achieve this goal by not only making it more expensive to borrow money, but also, by leading to higher interest rates for savings accounts and CDs. 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.
Where things stand with inflation
In June 2022, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, was up a whopping 9.1% on an annual basis. In March, the CPI was up just 5% on an annual basis.
Clearly, that's a major improvement. But it's also not where the Fed wants inflation to be.
The Federal Reserve has long targeted 2% as its ideal rate of annual inflation. That rate, the central bank believes, tends to lend to a stable economy. Because the most recent CPI reading is still a ways off from 2%, we shouldn't expect the Fed to lower interest rates anytime soon.
In fact, in late March, the Fed issued a statement that said, "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run...The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."
Since the Fed isn't backing down on its 2% inflation target, we should not expect interest rates to decline until inflation is much closer to that point, or even at that point. Now, it may be that inflation manages to go from 5% to 2% within the course of the next seven months or so. But it's not going to happen overnight, and there's a good chance we won't see 2% inflation at any point in 2023.
How to cope with higher interest rates
Because it's gotten so expensive to borrow money, a good bet these days is to avoid taking out a loan if you can avoid it. If your car gives out on you and you need a new one to function, then an auto loan, for example, might be unavoidable. But 2023 may not be the best year to borrow money to renovate your house if the work at hand isn't crucial.
At the same time, if you can, try to capitalize on today's higher interest rates by putting more money into the bank. Seeing as how there are still rumblings about a potential 2023 recession, it's a good time to boost your emergency fund. And the more cash you keep in a savings account, the more interest you stand to rack up.
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FAQs
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 interest rates go down again in 2023? ›
“[W]ith the rate of inflation decelerating rates should gently decline over the course of 2023.” National Association of Realtors (NAR). “[F]orecasts that … mortgage rates will drop—with the 30-year fixed mortgage rate progressively falling to 6.0% this year and to 5.6% in 2024.”
Will interest rates go down in 2023 or 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 is the Fed rate prediction for 2023? ›
The central bank is expected to boost its benchmark rate to a range between 5% and 5.25%, reflecting an increase 0.25 percentage points, according to economists polled by financial data company FactSet.
Will interest rates go down in May 2023? ›
May mortgage rate predictions
Mortgage rates are likely to remain volatile this month. While most forecasters call for them to ease below 6 percent later this year, that prediction assumes the Federal Reserve's war on inflation will continue to bear fruit.
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.'
Will interest rates go down in December 2023? ›
After home financing costs nearly doubled in 2022, some relief is in sight for potential homebuyers in 2023. The interest rate for a 30-year fixed-rate mortgage in the U.S. is expected to drop to 5.25% by the end of this year, according to a forecast by the financial services website Bankrate.
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.
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.
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
A “good” mortgage rate is different for everyone. In today's market, a good rate could be 6% for one borrower and 8% for another on the same day. To understand what a good mortgage rate looks like for you, get quotes from a few different lenders and compare them.
Will the Feds raise interest rates again? ›
Experts seem to agree that the Fed is unlikely to raise rates again in June.
What will US interest rates be in 2024? ›
In the long-term, the United States Fed Funds Rate is projected to trend around 3.75 percent in 2024 and 3.25 percent in 2025, according to our econometric models.
Where will mortgage rates be at the end of 2024? ›
30-Year Mortgage Rate forecast for December 2024. Maximum interest rate 4.52%, minimum 4.21%. The average for the month 4.33%. The 30-Year Mortgage Rate forecast at the end of the month 4.39%.
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."
Do we expect mortgage rates to drop? ›
Other experts agree that rates will likely come down in the next few years. Even so, we're unlikely to see the low rates we saw in 2021. “Interest rates are currently at a 15-year high, so it's difficult to envision this lending environment as going …
Will interest rates come back down? ›
1) Interest-rate forecast.
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.
