There is a common saying about interest rates: they fall quickly and rise slowly. This metaphor highlights how fast the Federal Reserve is in cutting borrowing costs, often during economic crises, and how they gradually raise them when the economy recovers.
This has not happened during the most severe inflation spike in four decades. One could say that borrowing costs have increased quickly. In just 16 months, officials at the Federal Open Market Committee (FOMC) raised their benchmark rate from near zero to a 22-year high of 5.25-5.5 percent. And now, as U.S. central bankers indicate they are preparing to lower borrowing costs sometime this year, it seems that rates will choose the stairs on their downward journey.
Interest Rate Forecasts for 2024
The Federal Reserve is likely to cut interest rates only twice this year, as inflation takes longer to cool than U.S. central bankers currently believe, according to 2024 interest rate forecasts from Bankrate’s chief financial analyst, Greg McBride, CFA. This is one cut fewer than U.S. central bankers themselves expect for next year, according to their latest interest rate outlook in December. It is also less dovish than what investors currently think. CME Group’s FedWatch tools indicate that markets estimate there will be six quarter-point cuts in all Federal Reserve meetings in 2024.
Any cut in interest rates from the Federal Reserve will help reduce borrowing costs. McBride expects every type of consumer borrowing to become cheaper this year, starting from auto financing rates to the cost of tapping into your home equity.
Mortgage Rate Forecasts
Mortgage rates are expected to decline but will remain at their highest level in over a decade. Mortgage rates for 2023 ended up cooling almost as quickly as they had risen. This year’s primary home buying rate started on a downward slope, dropping to 6.27 percent in early February after beginning the year at 6.71 percent. However, it quickly fluctuated to peak, exceeding 8 percent for the first time since 2000 by the end of October 2023.
The rise in mortgage rates last year did not make buying a home much easier. A 30-year fixed mortgage on a $500,000 home would cost $2,089 per month in principal and interest when rates were at an all-time low of 2.93 percent, according to Bankrate’s mortgage calculator. The monthly cost would now be $3,293 – a 58 percent increase – with the 30-year fixed mortgage rate at 6.9 percent. Lower mortgage rates help save about $400 from the cost that it would have been when rates reached 8 percent.
As inflation continues to slow this year, it will further decrease the yield on the 10-year Treasury bond from its current level. McBride predicts that the yield on the 10-year benchmark bond will reach 3 percent, compared to its end-of-year level of 3.88 percent. The 30-year fixed mortgage rate is likely to fall to 5.75 percent, according to his forecasts.
It may be a somewhat bumpy ride, according to what McBride says. Mortgage rates will spend most of the year in the 6 percent range, and he anticipates that the movement below 6 percent will be confined to the second half of the year.
But
This decline will only bring the primary home financing rate back to 2022 levels. Before the rapid interest rate hikes from the Federal Reserve, mortgage rates hadn’t reached this high level since 2009.
Meanwhile, a drop in mortgage rates may not do much to solve the main affordability issues in the U.S. housing market. In some cases, it might even exacerbate the problem.
According to McBride: “If bond yields and mortgage rates are on a slow decline consistent with moderate economic growth and easing inflation pressures, it’s likely they won’t lead to an increase in home prices.” “But if mortgage rates suddenly drop, that could bring enough demand into the market given the very limited supply that still exists.”
Home Equity Loan Forecast
Home equity loans are expected to continue being expensive debt forms in 2024. Throughout the year, home equity line of credit and home equity loan rates have steadily risen. But it all ended in November 2023. The average home equity line of credit rate surpassed 10 percent, the highest level on record going back more than 31 years. Meanwhile, home equity loan rates approached 9 percent.
From start to finish, home equity line of credit rates rose by 2.5 percentage points, while home equity loan rates increased by over a percentage point. The speed of the rise was surprising for a form of debt closely tied to federal interest rates, according to McBride.
McBride estimates that home equity borrowers may have seen those record-high levels before they appeared in the Bankrate survey, where promotional offers may have kept the national rate lower. As some of those offers ended, reality set in.
According to his forecasts, home equity line of credit rates will decrease to 8.45 percent by the end of 2024, over 1.5 percentage points lower than their level at the end of 2023. The home equity loan rate is expected to drop by about half a percentage point from its current level to 8.5 percent. Both of those levels will be among the highest in years – if not decades.
According to McBride: “Those prices are so high that they’re not something you choose as much as something you have to do. It’s because you need to replace the roof and that’s where the money comes from; you have necessary repairs or updates. Instead of having cash to pay for them, home equity becomes the alternative.”
Not all homeowners have the ability to time the market, and one positive point for the coming year is the continued strength of the U.S. economy. Avoiding a financial system recession means loans may be more willing to bring back some enticing offers – though whether borrowers can take advantage depends on their credit scores.
According to McBride: “Make sure your credit score is in good shape, and shop around for the best rates. Those are the two things you can do to move the needle and get a better price. The biggest impact on the price you’ll get next year won’t be what the Federal Reserve does.”
Auto Loan Rate Forecast
Auto loan rates are expected to decline, but low-income borrowers may feel pressured. Price cuts from the Federal Reserve are expected to ease the cost of auto financing. McBride expects new five-year auto loan rates to drop to 7 percent from their current level of 7.71 percent, while four-year used car loan rates could decrease to 7.5 percent from 8.29 percent. Competition among bank loans may increase if the economy continues to avoid recession, leading some companies to offer better rates than others.
And with
That said, banks reserve their best offers for those with more attractive credit profiles.
According to what McBride says, “Borrowers with poor credit will find a path filled with tight credit and double-digit interest rates.”
New and used car prices began to decrease since the onset of the pandemic, but they are still more expensive today compared to pre-spread levels.
New car prices have risen by 21 percent since February 2020, while used car prices have increased by 51 percent, according to data from the Bureau of Labor Statistics. Kelly Blue Book data shows that the average monthly car payment is almost $800 – which McBride describes as “budget-busting.”
The significant price increase and high financing costs particularly hit borrowers with credit scores between 501 and 600. Delinquency rates for those in the subprime credit category are the highest since the Bill Clinton era.
According to McBride, “This is a problem that has been worsening for years. Borrowers have been extending loan terms to make their monthly payments more manageable, which can also prevent them from building equity quickly. This may affect their chances for refinancing or making a deal – especially if those borrowers owe more than their car is worth.”
Deposit Return Forecasts
Deposit returns are likely to have peaked, but the win for savers won’t end in 2024 – even if banks begin to trim offers. Returns are expected to remain at their highest levels in over a decade despite two interest rate cuts by the Federal Reserve, according to McBride.
The average return on a one-year certificate of deposit is expected to drop to 1.15 percent nationally next year from its current level of 1.77 percent, according to McBride’s 2024 forecast. Meanwhile, the average interest rate on a five-year certificate of deposit is expected to decrease to 1 percent from 1.43 percent.
However, the highest returns are expected to reach 4.25 percent and 4 percent, respectively. This still remains higher than any time since the Great Recession of 2007 to 2009.
The same story applies to savings accounts. Those returns are expected to decrease to 0.3 percent by the end of 2024, although the best offers in the market will reach 4.45 percent, according to McBride’s forecast. Money market accounts will drop to 0.35 percent. The best news overall: moderate inflation means the money you have on the side won’t lose much purchasing power. If you keep your savings in the right account, your returns are likely to outpace price pressures.
McBride compares this to gross and net pay for workers. Gross pay may be what workers focus on, but net pay after taxes and other deductions is what pays the bills.
According to McBride, “It will be a great year for savers when those returns are measured against low inflation rates. In 2024, seeking better returns will mean outpacing inflation. Not seeking them and settling for the average will mean falling behind inflation.”
Credit Card Rate Predictions
Credit card rates are expected to decrease, but they will remain expensive. Carrying a credit card balance has never been cheap. Even when the central bank’s key interest rate was near zero, credit card rates hovered around 16 percent, according to Bankrate’s price data.
Made
The aggressive Federal Reserve has much worse consequences for credit card debt. Credit card rates surpassed 19 percent for the first time – the highest level on record – in November 2022. Throughout 2023, they rose further as the Federal Reserve continued to raise rates.
Making minimum payments to eliminate the average credit card balance of about $6,000 will take roughly 25 years for borrowers – and nearly $10,000 in interest, according to Bankrate’s credit card payment calculator.
Bankrate’s forecasts only expect modest relief. McBride expects the average rate to stay above 20 percent for most of the year, dropping to 19.9 percent by the end of 2024 as the Federal Reserve cuts rates. This would pull down nearly a point from its all-time high of 20.74 percent during the week ending December 27.
Credit card rates track the prime interest rate, which closely follows the federal funds rate. Americans should see a difference in their monthly statements within one to two billing cycles after any change in the interest rate.
Eliminating credit card debt should remain one of Americans’ financial priorities in the new year. The good news for borrowers, avoiding a financial recession means it won’t be hard for Americans to find balance transfer cards with a zero annual percentage rate (APR) next year.
In fact, one reason McBride expects credit card rates to fall faster than the central bank’s prime rate next year is that he anticipates the U.S. economy will continue to avoid a recession.
According to McBride: “This will be your easiest exit from 20 percent credit card debt. Taking advantage of low-rate balance transfer offers can help you pay off debt faster.”
See how our interest rate forecasts performed in 2023
Last year was another volatile year for interest rates. The 30-year mortgage technically ended 2023 with a 19-point spread
Source: https://www.aol.com/bankrate-interest-rate-forecast-2024-051007248.html
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