For the Federal Reserve’s most aggressive rate-hiking campaign in four decades, 11 times may actually be the charm.

At their last rate-setting meeting of the year, officials on the Federal Open Market Committee (FOMC) gave their clearest signal yet that they’re likely done raising borrowing costs.

Policymakers in December decided to extend their rate pause for a third straight meeting, leaving their key benchmark interest rate in its 22-year high of 5.25-5.5 percent. Meanwhile, not a single policymaker is penciling in more interest rate hikes for 2024, updated rate projections released along with the December rate decision show.

If borrowing costs go anywhere else from here, the Fed is also admitting that they’re most likely to head down — not up. Just two Fed officials expect that their key federal funds rate will hold at its current level in 2024. The remaining 17 U.S. central bankers expect at least one rate cut next year — and 16 of them see more than one.

Every indication is that the Federal Reserve is done raising interest rates. How long interest rates remain at these levels and how much the Fed cuts interest rates are the key questions for 2024. — Greg McBride, CFA | Bankrate chief financial analyst

The Fed’s ‘pivot’ might not be as aggressive as investors think

At the Fed’s post-meeting press conference, Chair Jerome Powell even continued to drive home the message that the Fed is likely done. Participants aren’t taking extra rate hikes off the table, he said, but they still believe rates are either “at or near” their peak.

The message gave markets a sugar high. The S&P 500 closed 1.4 percent higher the day of the Fed’s decision and is now not even a full percent off its all-time high from the end of 2021. The Dow Jones Industrial Average hit a record high on Dec. 13 following the Fed’s decision. It’s eclipsed new records every day since.

Investors are pricing in an even more aggressive series of rate cuts for 2024 than Fed officials, expectations that are fueling the market rally. By December 2024, investors think rates could hit 3.75-4 percent, indicating five quarter-point cuts, according to CME Group’s FedWatch tool. Just one Fed official expects that the Fed will be able to cut borrowing costs that much next year, with most Fed officials projecting three quarter-point cuts.

Economists were just as surprised by the Fed’s pivot.

It’s not as if most experts hadn’t already expected that the Fed was done. Morgan Stanley, Capital Economics and Moody’s Analytics joined the ranks of prominent Wall Street firms and analysts who projected that the Fed wouldn’t need to raise borrowing costs anymore from here. That’s even after Fed officials in September suggested that one more increase was on the table.

Rather, what surprised experts most about the decision was just how confidently the Fed signaled that they’re done — knowing the kind of market reaction such a proclamation could ignite.

Market participants have long been known to get ahead of themselves. Before the Fed even signaled that interest rates had hit their peak, financial conditions had quickly — and dramatically — loosened in the six weeks between the Fed’s November and December meetings. The 10-year Treasury yield dropped more than half a percentage point, helping send the 30-year fixed-rate mortgage down almost three quarters of a percentage point by Dec. 6. On Oct. 25, that rate topped 8 percent for the first time since 2000.

Experts say the market’s euphoric reaction could also resurface the threat of inflation — especially if confidence rebounds and spending picks back up.

“I’m concerned about declaring victory too early,” says Scott Anderson, chief economist and executive vice president at BMO Capital Markets, of the Fed’s clear signal in December. “It’s the change that really matters for the market, and the pivot of taking that threat of further rate hikes off the table is a big thing.”

The Fed is seeing major progress on inflation — without harming the economy or the job market

Falling inflation is one reason for the surprising change of tune. The Fed’s preferred gauge of measuring inflation rose just 3 percent from a year ago in October, less than forecast and the lowest since March 2021, Department of Commerce data shows. Even when looking at stickier housing and services costs, so-called “core” prices rose just 3.5 percent from a year ago, a 2 percentage point drop from its 40-year high in February 2022.

In their latest projections, policymakers downgraded their estimates for those two measures of inflation for 2024, expecting that both will sink to 2.4 percent next year. For the first time since the Fed began raising borrowing costs, most officials think the risks surrounding inflation are more likely “broadly balanced” than weighted to the upside — a major sign of confidence that price pressures are on the decline.

Still, Fed officials say there’s a higher degree of uncertainty surrounding inflation. Powell said the job isn’t over yet and added that officials won’t hesitate to raise borrowing costs again.

“Ongoing progress toward our 2 percent inflation objective is not assured,” he said. “The economy has surprised forecasters in many ways since the pandemic.”

But the higher rates climb and the more inflation falls, the more room policymakers have to be mindful of the other side of their mandate: maximum employment. Typically, inflation and unemployment have an inverse relationship. When one goes up, the other goes down.

To be sure, some moderation has occurred. Employers have so far created about half as many jobs as they did in 2022. Job openings are still above pre-pandemic levels but have dipped to 8.7 million from a record high of 12 million in March 2022.

By historic standards, however, the job market’s resilience persists. Joblessness has edged up only slightly from its half-century low of 3.4 percent to 3.7 percent. It’s also held below 4 percent for 22 consecutive months — the longest stretch of time since the 1960s.

“Inflation has eased from its highs, and this has come without a significant increase in unemployment,” Powell said in December. “That is very good news.”

Policymakers are starting to point out that the risks to the nation’s unemployment rate are tilted toward the upside. Since the Fed first slowed down its rapid rate hikes last June, Powell has started saying that the risks of overdoing rate hikes are almost equal to the risks of doing too little.

“We’re getting what we wanted to get” out of raising rates, Powell said in an early December address at Spelman College in Atlanta. “Having come so far so quickly, the committee is moving forward carefully.”

If the Fed is done raising interest rates, these are the most important steps to take with your money

The Fed’s decisions impact almost every financial decision you make. Anytime the Fed raises interest rates, consumers see it reflected on their credit card balances, personal loan financing costs, auto loan rates and more.

Regardless of who’s right — investors or Fed officials — about the amount of rate cuts in 2024, borrowing costs will still be the highest in over a decade.

1. Eliminate high-cost, variable-rate debt

Americans are more vulnerable to higher interest rates if they have a variable-rate loan, especially if it’s debt on a high-interest credit card. The average credit card rate is hovering at the highest levels ever recorded, most recently 20.72 percent, thanks to the Fed’s recent inflation fight, according to Bankrate data.

Calculate whether transfering that debt to a balance-transfer card can help you save money in the long run. Oftentimes, it involves paying a fee, but you may end up saving money on interest and speeding up your repayment if you can take advantage of a 0 percent introductory annual percentage rate (APR).

Homeowners with an adjustable-rate mortgage or a home equity line of credit (HELOC) should consider refinancing into a fixed-rate loan, McBride says.

2. Boost your emergency savings

Uncertainty underscores the importance of finding ways to boost your emergency savings. Financial experts’ typical rule of thumb recommends that Americans have anywhere between six to nine months’ worth of expenses stashed away.

The one silver-lining to rising rates: The best yields in over a decade can even help savers grow their rainy-day fund even quicker — and also grow their purchasing power. Yields at online banks have been beating inflation for eight months now.

3. Lock in a long-term CD

If you already have an emergency fund, consider locking in those elevated yields by opening a 2-year or 5-year certificate of deposit (CD). Savings account yields are variable, and banks can trim those offers long before the Fed reduces its own benchmark.

4. Keep the course with your retirement contributions

Investors are in for a rude awakening if the Fed doesn’t cut borrowing costs as much as they expect. Hawkish Fed surprises could lead to more market volatility — but it shouldn’t matter to the long-term investor who has a diversified portfolio. Stay the course with your retirement contributions and see any downdraft in the market as an important buying opportunity.

“At some point, the market is going to have to come to the Fed, or the Fed is going to come to the market,” says Mark Fleming, chief economist at First American Financial Corporation. “The forecast is one thing. The reality is another.”