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:
Although you likely won't see the low rates buyers enjoyed during the pandemic, mortgage rates are still expected to dip in 2025. There's no surefire way to know how much of a drop to expect, but experts predict they could reach 6%.
The median estimate for the fed-funds rate target range at the end of 2025 moved to 3.75% to 4%, from 3.5% to 3.75% in December. For the end of 2026, the median dot now shows a target range of 3% to 3.25%, versus 2.75% to 3% three months ago.
Mortgage rates are currently expected to continue trending down through 2024 and into 2025. The Mortgage Bankers Association thinks that 30-year mortgage rates could fall to 5.9% in 2025.
On June 12, 2024, the US Federal Reserve released the June 2024 Fed dot plot, which showed a projected 2.25-point interest rate cut by yearend 2026. This would reduce the fed funds target rate range from 5.25%-5.50% today to 3.00%-3.25%.
The 10-year treasury constant maturity rate in the U.S. is forecast to decline by 0.8 percent by 2026, while the 30-year fixed mortgage rate is expected to fall by 1.6 percent. From seven percent in the third quarter of 2023, the average 30-year mortgage rate is projected to reach 5.4 percent in 2026.
The market-implied path for base rate in May's Bank of England's Monetary Policy Report is that it will fall from 5.25 per cent to around 3.75 per cent by the end of 2026. It's worth pointing out that this forecast has risen by 0.7 percentage points on average, compared with the equivalent period in February's report.
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.
The average forecast shows rates at 4.5% by the end of the year, while according to analysis by research firm Capital Economics, rates will hit 4% by the end of 2025.
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.”
By the end of 2025, policymakers anticipate a policy rate of 4.1%, according to the median of their projections, implying an additional four quarter-of-a-percentage-point cuts next year.
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.
Although you likely won't see the low rates buyers enjoyed during the pandemic, mortgage rates are still expected to dip in 2025. There's no surefire way to know how much of a drop to expect, but experts predict they could reach 6%.
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. Keep in mind: The longer you plan to live in a home, the more potential benefit you'll get from paying for points.
The Federal Reserve has indicated it may cut rates later in 2024. Certified financial planner Amy Hubble told CNBC Select she doesn't expect a rate cut until at least September.
Also, mortgage rates are still much higher than we've been used to in recent years. On 30 May 2024, the average 2 year fixed mortgage rate is 5.80%. While this is a significant drop from its July 2023 peak of 6.86%, it's still much higher than December 2021 when was 2.34%.
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023.
Introduction: My name is Corie Satterfield, I am a fancy, perfect, spotless, quaint, fantastic, funny, lucky person who loves writing and wants to share my knowledge and understanding with you.
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