The Federal Reserve has been keeping a close eye on inflation for good reason: That’s its job. The central bank is tasked with overseeing monetary policy in the U.S., and the decisions it makes are meant to lend to a stable, thriving economy.
Since mid-2021, inflation has been elevated, spurred by a combination of supply chain issues and generous stimulus policies that gave Americans more cash to spend. In response to rampant inflation, the Fed has implemented a series of interest rate hikes that have driven the cost of consumer borrowing up to a large degree.
But October’s inflation data was positive all around. And in light of that, the Fed may just decide that its days of raising interest rates are done with.
Good news on the inflation front
In October, the Consumer Price Index, which measures changes in the cost of common goods and services, remained unchanged from September. It also fell to 3.2% on an annual basis. That’s an improvement from September, when annual inflation was measured at 3.7%.
The Fed, meanwhile, likes to aim for an annual inflation rate of 2% over the long run. It feels that this level is conducive to a strong economy.
Clearly, 3.2% annual inflation isn’t 2%. But it means the Fed is getting closer to its goal. Between that and the fact that the Fed really doesn’t want to drive the economy into a recession, the central bank may decide that it’s made adequate progress in its fight against inflation. And it may opt to not raise interest rates at its upcoming December meeting.
Now, this doesn’t mean that the Fed won’t then turn around and raise interest rates in 2024. But if it doesn’t raise rates at its next meeting, a 2024 interest rate increase could become even less likely. And that’s great news for consumers.
When will borrowing get less expensive?
The Federal Reserve isn’t in charge of setting consumer interest rates, such as the rates attached to products like auto and personal loans. Rather, it’s the Fed’s job to control the federal funds rate, which is what banks charge each other for short-term borrowing.
But when the federal funds rate rises, banks and financial institutions tend to compensate for their added costs by raising rates on consumer products like home equity loans, mortgages, and vehicle loans. A rise in the federal funds rate can also lead to higher interest rates on products like credit cards and HELOCs (home equity lines of credit).
The cost of borrowing, which is high today, likely won’t really come down until the Fed starts cutting rates. And that’s unlikely to happen this year, though there’s a strong chance it will happen in 2024.
So the quick answer is that the days of less expensive borrowing could slowly but surely start to return in the new year. This isn’t to say that loans will become cheap. But by mid-year, consumers may be in for notable relief.
Until then, though, it’s best for consumers to hold off on signing fixed loans if possible. And those with credit card debt should do their best to whittle down their balances to save money on interest.
Of course, none of this is to say that the Fed is guaranteed not to raise interest rates at its upcoming December meeting. But based on the most recent inflation data we have, a near-term rate hike is looking pretty unlikely. That’s something consumers can take comfort in.
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