Key takeaways

  • The Federal Reserve is currently penciling in three rate cuts for 2024, according to officials' median rate estimate.
  • Investors think the Fed will be even more aggressive, betting on six cuts in 2024 worth a cumulative 1.25 percentage point beginning in March.
  • Top economists on Wall Street see anywhere between three to four rate cuts next year beginning as early as the Fed's March meeting.

When it comes to the Federal Reserve cutting interest rates, it’s not a question of “if.” It’s a matter of “when.”

At some point next year, policymakers on the U.S. central bank say they will start walking back a few of the massive rate hikes that they’ve approved since 2022 to squelch inflation. That was at least the biggest — and most surprising — takeaway for Fed watchers when officials wrapped up their final rate-setting meeting of the year.

Just two of the 19 officials on the rate-setting Federal Open Market Committee (FOMC) estimate that interest rates will stay in their current target range of 5.25-5.5 percent by the time 2024 comes to a close, new projections released along with the announcement show. Everyone else on the U.S. central bank expects to cut interest rates at least once. One official, meanwhile, sees six rate cuts.

Those are year-end projections, offering no specific clues on timing. Investors, however, are hoping the highest interest rates in more than two decades will come to a quick end. They expect the Fed to begin cutting interest rates by its second meeting of the year in March. They then see officials following up with cuts at all of their subsequent meetings except one.

If investors’ wishful thinking comes true, policymakers will cut borrowing costs by a quarter point six times across its eight total scheduled meetings next year.

Some economists are also starting to think the Fed could cut rates by March, though they aren’t projecting officials to be as aggressive about it. Fed officials first have to decide how low they want inflation to fall before reducing interest rates — and they might want to see more evidence of a slowdown before letting up on the brakes.

Nothing in the economy suggests the Fed needs to be in a hurry to cut interest rates in 2024. In a soft-landing scenario, the Fed only needs to trim rates in response to further easing in inflation pressures, just enough to maintain tight policy without loosening it. — Greg McBride, CFA | Bankrate chief financial analyst

The Fed looks more likely to cut borrowing costs than increase them next year

A closer look at the Fed’s updated rate projections shows that just one Fed official sees one rate cut for 2024. Five policymakers see two cuts, while six central bankers see three cuts and four officials see four cuts.

Most Fed watchers pay attention to the Fed’s median rate estimate, which pencils in a 4.5-4.75 percent target range for the Fed’s key federal funds rate. That indicates three quarter-point rate cuts for next year.

Those new estimates were quite the pivot from the last update to the Fed’s projections in September. At the end of the third quarter of 2023, officials said they had one more rate increase on the table. They also expected to only cut borrowing costs twice throughout 2024. Put another way: “The Fed expects rates to be one-half percentage point lower at the end of next year than was the case just three months ago,” McBride says.

The message was also a major change of tune from just a few weeks prior. At a Dec. 1 public address, Powell stressed that it was premature to speculate about rate cuts, adding that officials hadn’t even begun broaching the subject. By the Fed’s Dec. 13 post-meeting press conference, the chief central banker admitted that the committee started to discuss it.

“There’s a general expectation that this will be a topic for us looking ahead,” Powell said, referring to cuts.

For Fed watchers looking for clues on the timing for rate cuts, history can be a guide. During the Fed’s previous tightening cycle between 2015 and 2018, officials began cutting borrowing costs seven months after rates peaked, a Bankrate analysis of the Fed’s previous rate moves shows. With the Fed’s July rate hike likely its last, that timeline could put Fed officials on track to cut rates by their March meeting — matching investors’ projections.

In 2007, policymakers began reducing borrowing costs 15 months after rates hit their peak, though that’s because the U.S. economy plunged into the throes of the financial crisis.

The Fed looks like it’s pulling off the unthinkable ‘soft landing’ of the US economy

But past performance doesn’t always guarantee future results. Just as important as the question of when the Fed will cut interest rates is the reason behind it.

The U.S. economy is ending the year in a much better position than U.S. central bankers thought it would. A year ago, the Fed expected that the financial system would grow at a measly 0.5 percent annualized rate in the fourth quarter of 2023. Officials expected unemployment to end the year at 4.6 percent, with inflation continuing to hold more than a percentage point above their 2 percent target.

In reality, the U.S. economy is on track to grow 2.7 percent in the final quarter of the year, the Atlanta Fed’s GDPNow tracker shows. Unemployment has edged up only to 3.7 percent from a half-century low of 3.4 percent. And the surprisingly resilient economy hasn’t come at a detriment to slowing inflation, most important to Fed officials. The Fed’s key inflation gauge hit 3 percent in October — a sharper slowdown than forecast — and is now predicted to dip to 2.8 percent by the end of the year, the Fed’s new projections show.

Ever since the Fed began raising borrowing costs, market participants have been hedging their bets that U.S. central bankers would have to reverse course. This time around, however, they seem to be indicating that the reasoning for those rate cuts is changing.

Fears of the Fed kick-starting a devastating recession by hiking interest rates too aggressively caused the S&P 500 in 2022 to plunge the most in a single year since 2008. But after the Fed’s last rate-setting meeting of 2023, financial markets look like they might end the year on an optimistic note. That key stock index is now less than a percent below its all-time high — and could eclipse that record before 2023 comes to a close. Another stock index has already soared to new heights: the Dow Jones Industrial Average.

Some Fed officials are trying to cool the market’s fever. In his first public appearance since the Fed’s December rate decision, New York Fed President John Williams said the Fed isn’t “really talking about rate cuts” right now. Rather, policymakers are focused on whether they’ve raised rates enough.

Atlanta Fed President Raphael Bostic even indicated which of the Fed’s 19 anonymous dots were his own: He’s one of the five officials expecting two rate cuts in 2024. But he also added that he isn’t expecting them until the second half of next year.

“I’m not really feeling that this is an imminent thing,” he said.

To justify rate cuts, the Fed needs to find its ‘magic’ inflation number

Still, some camps at the Fed are starting to talk about the conditions that could make rate cuts necessary — mainly, falling inflation. San Francisco Fed President Mary Daly and Chicago Fed President Austan Goolsbee both admitted that rate cuts would be necessary if inflation continues decelerating next year, as both officials currently expect.

“There is more work to do, and at this point, that work includes not only focusing on bringing inflation down to 2 percent,” Daly said. “We want to continue to do this gently, with as few disruptions to the labor market as possible.”

The debate gets at the subject of the “real” cost of money — that is, interest rates minus inflation. Economists say it could become the most important way of judging just how restrictive monetary policy is next year, as well as how restrictive interest rates have to be.

In theory, the Fed doesn’t have to wait until inflation officially hits 2 percent before it begins cutting interest rates. Instead, it might be able to follow inflation on the way down, especially if policymakers agree that interest rates have already reached a level that they’d consider “sufficiently restrictive” to bring down inflation.

Interest rates are currently 225 basis points above the Fed’s preferred gauge of inflation. If price pressures slow any more, that margin will widen — increasing the force at which interest rates are currently slowing down the economy.

“They can keep policy stable if they reduce rates at the same pace that inflation is declining,” says Jordan Jackson, vice president and global market strategist at J.P. Morgan Asset Management.  “That keeps the same level of restrictiveness in the economy.”

Goldman Sachs is currently expecting that softening inflation will help the Fed cut interest rates by three quarter-point increments in March, May and June. Bank of America sees four quarter-point rate cuts at every other meeting starting in March next year.

Yet, Vincent Reinhart, chief economist and macro strategist at Dreyfus and Mellon who formerly worked as a Fed staffer and economist, has said it could be too soon to cut interest rates before the fall.

“If you told me the Fed is cutting rates at the June meeting of next year, then I’m probably going to go, ‘Oh, I don’t know,’” he says, referring to his own fears of the Fed reigniting inflation. “Given the way Powell talks about that sincere desire to get inflation back to 2 percent, it probably requires them to keep the funds rate where it is through the fall of next year.”

What rate cuts in 2024 could mean for your money

While the timing for rate cuts may still be a guessing game, the message for consumers is clear: Barring a major economic catastrophe, near-zero interest rates from the Fed aren’t around the corner anytime soon.

“It would take a severe recession to cause the Fed to not just pause and not just cut rates moderately, but to decide it’s going to go aggressive in the other direction,” says Yung-Yu Ma, chief investment officer for BMO Wealth Management. “A soft-landing where the Fed is aggressively cutting rates is not a scenario we think is likely to play out.”

Even the most aggressive rate-cut expectations — 1.25 percentage point — would take the Fed’s benchmark rate to a level last seen in 2007. That means the cost of borrowing money is likely also going to remain more expensive than it did during the pandemic-era, as well as the immediate years after the financial crisis.

The Fed’s decisions influence the rates consumers pay to finance purchases both big and small, from credit cards or personal loans to car loans and even mortgages. Borrowers will want to focus on eliminating any high-cost, variable-rate debt.

Lower rates next year also won’t mean the wins for savers are over. Falling inflation will help protect your purchasing power, and elevated interest rates mean banks will still offer attractive yields on deposit accounts. Rates hitting their peak may also mean it’s a good time to lock in a certificate of deposit (CD).

“It’s been all about inflation, inflation, inflation at the Fed,” Ma adds. “The trend for inflation — if it continues to stay on a downward trajectory — will give the Fed a little bit of breathing room to take some of those considerations about how the economy is evolving more into play.”