Interest rates play a pivotal role in shaping the economic landscape, influencing factors such as inflation and financial markets. The Federal Reserve, commonly known as the Fed, serves as the central bank of the US, determining the target for the federal-funds rate. This rate signifies the interest that banks charge each other for overnight loans. The federal-funds rate, in turn, ripples through other interest rates like the 10-year Treasury yield, representing the return on a 10-year government bond, and the 30-year mortgage rate, the average interest rate for a 30-year home loan.
As of December 2023, the Fed's projections indicate to maintain the federal funds rate to 5.25% by the end of 2023, maintaining this level through 2025. However, differing opinions exist regarding the duration of the Fed's tightening of monetary policy and the potential for a shift towards lowering interest rates.
Here's an overview of the current situation, possible scenarios, and expert opinions.
The policymakers expect rates to stay above 5% in 2024 and around 4% by the end of 2025.
Possible Scenarios
Rates Could Go Down
If inflation falls significantly, the Fed might ease its stance and start cutting rates in late 2024 or early 2025.
A severe economic downturn could also force the Fed to lower rates to stimulate borrowing and growth.
Rates Could Stay High
If inflation remains stubbornly high, the Fed might keep rates elevated throughout 2025.
A stronger-than-expected economy could also lead to continued rate hikes.
Expert Opinions
Some experts believe rates will start falling in 2024-2025, but not as much as markets anticipate.
Others warn that the Fed might keep raising rates into 2025, surprising markets and hurting the economy.
Ultimately, the decision depends on the Fed's assessment of inflation and economic data in the coming months.
Other Forecasts on Interest Rates
One outlook is offered by Trading Economics, a platform specializing in economic data and analysis. According to their predictions based on recent data, Trading Economics anticipates the interest rate to descend to 4.25% in 2024 and 3.25% in 2025. Their forecast suggests that the Fed may need to reduce interest rates in response to a slowdown in economic growth and a decline in inflation.
Another perspective comes from Morningstar, a financial services company offering investment research and advice. Analyst Preston Caldwellcontends that political pressure will mount on the Fed to ease monetary policy as inflation moderates and unemployment rises. He predicts a commencement of interest rate cuts in 2024, bringing them down to 2% by the close of 2025. Caldwell posits that reduced interest rates will contribute to a bolstered economic growth and increased housing demand in 2024 and 2025.
So, will interest rates go down in 2025 in the US? The answer hinges on individual perspectives and assumptions about the economy, inflation, and the Fed's course of action.
While the Fed's own projections suggest sustained high interest rates until 2025, analysts and economists vary in their forecasts, foreseeing the possibility of lower interest rates in 2024 and 2025. As with any forecast, uncertainties and risks persist, underscoring the importance of vigilance and staying informed about potential changes or surprises through continuous monitoring of data and news.
Here are some resources where you can follow the latest developments:
According to their predictions based on recent data, Trading Economics anticipates the interest rate to descend to 4.25% in 2024 and 3.25% in 2025. Their forecast suggests that the Fed may need to reduce interest rates in response to a slowdown in economic growth and a decline in inflation.
Here's where three experts predict mortgage rates are heading: Around 6% or below by Q1 2025: "Rates hit 8% towards the end of last year, and right now we are seeing rates closer to 6.875%," says Haymore. "By the first quarter of 2025, mortgage rates could potentially fall below the 6% threshold, or maybe even lower."
ING's interest rate predictions indicate 2024 rates starting at 4%, with subsequent cuts to 3.75% in the second quarter. Then, 3.5% in the third, and 3.25% in the final quarter of 2024. In 2025, ING predicts a further decline to 3%.
Importantly, the SEP projects that the Federal Funds rate will fall to 4.6% in 2024, 3.9% in 2025, and 3.1% in 2026. This implies three 25 basis point rate cuts in 2024. We are therefore lowering our Fed Funds forecast to four 25 bps cuts this year and another four 25 bps cuts in 2025.
We project the federal-funds rate target range to fall from 5.25% to 5.50% as of April 2024 to 2.75%-3.00% at the end of 2025 and 1.75%-2.00% at the end of 2026, after which the Fed will be done cutting. Likewise, we expect the 10-year Treasury yield to move down to 2.75% in 2026 from its current yield of 4.70%.
Lawrence Yun, chief economist at the National Association of Realtors, even told CNBC that he doesn't think mortgage rates will reach the 3% range again in his lifetime.
These futures can also be short-term or long-term. Short-term interest rate futures have an underlying instrument with a maturity of less than one year, while long-term interest rate futures have an underlying instrument with a maturity of over one year.
However, increases should slow between 2024 and 2026, and rates may even decline in 2027. Among the factors that could impact mortgage rates in the next 5 years are inflation, Federal Reserve policy, and economic growth. Homebuyers should consider locking in a low mortgage rate now, as rates are expected to rise soon.”
Last year, the White House projection for bill rates in 2030 was 2.4%. Such a level would be much higher than has been typical since the turn of the century. Three-month bill rates averaged around 1.5% over that period.
Legally speaking, there's no limit to how many times you can refinance your mortgage, so you can refinance as often as it makes financial sense for you. Depending on your lender and the type of loan, though, you might encounter a waiting period — also called a seasoning requirement.
Beyond the 35 percent of economists who expect rates to stay high through the end of 2026, 1 in 4 economists (24 percent) see rates holding above 2.5 percent until the end of 2025, while a smaller share (12 percent) see rates sticking at a restrictive level until the end of 2027 or later.
Porcelli sees Powell and other Fed officials as predisposed to lowering rates, and just waiting for the opportunity to do so. He expects at least one quarter-percentage-point rate cut by the end of 2024, if not two.
The 30-year fixed mortgage rate is expected to fall to the mid-6% range through the end of 2024, potentially dipping into high-5% territory by the end of 2025. Here's where mortgage interest rates are headed for the rest of the year and how that will impact the housing market as a whole.
“Mortgage rates will be at least a full 2% lower by 2025.” She adds that if the inflation rate holds at 2%, then we should see mortgage rates remain at lower levels for the balance of the next five years.
How low will interest rates drop in 2024? It's difficult to predict how interest rates will change but, in December 2023, the Fed predicted it would lower the federal funds rate to 4.6% by the end of 2024. That's the rate banks charge each other to borrow money, so it directly impacts the rate consumers pay.
Auto loan rates for new and used vehicle purchases fell in the first quarter of 2024 to 6.73% and 11.91%, respectively, down slightly from the 15-year highs we saw at the end of 2023, according to Experian.
This practice is sometimes called “buying down the interest rate.” Each point the borrower buys costs 1 percent of the mortgage amount. One point on a $300,000 mortgage would cost $3,000.
Higher interest rates tend to negatively affect earnings and stock prices (often with the exception of the financial sector). Changes in the interest rate tend to impact the stock market quickly but often have a lagged effect on other key economic sectors such as mortgages and auto loans.
Introduction: My name is Gregorio Kreiger, I am a tender, brainy, enthusiastic, combative, agreeable, gentle, gentle person who loves writing and wants to share my knowledge and understanding with you.
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