The Federal Reserve will make an interest rate decision this week. Here's what to expect. (2024)

This month marks the one-year anniversary of the Federal Reserve's most recent interest rate hike, which pushed rates to their highest point in 23 years. Now, with inflation continuing to cool, economists are making predictions about when the central bank will begin cutting.

The Fed is scheduled to meet on July 30-31, with Chair Jerome Powell set to discuss the bank's rate decision at 2:30 p.m. on Wednesday. After this week's session, the Fed will next discuss its benchmark federal funds rate at its September 17-18 meeting.

Wednesday's announcement is likely to offer a mixed bag for consumers and businesses grappling with the highest borrowing costs in years, experts say.

First, economists say it's unlikely the Fed will announce a rate cut this week because Powell has signaled he wants to see more proof that inflation is closer to the bank's goal of a 2% annual rate before trimming. But Powell is also expected to offer a hint on when the bank will start cutting, with about 9 in 10 economists pegging the September meeting for the Fed's first rate reduction since 2020, according to financial data company FactSet.

"The case to cut is already strong, and the Fed will likely use the July meeting to plant a seed that a cut in September is on the table," predicted Ryan Sweet, chief U.S. economist at Oxford Economics, in a Friday research report.

The markets are still betting on more than a single rate cut in 2024, even though Fed officials earlier this year projected just one rate cut later in the year. But with inflation easing faster than projected in June, futures markets have priced in a 64% likelihood that the Fed will cut rates three times this year — in September, November and December, accordingto CME FedWatch.

What is the Fed's current interest rate?

The federal funds rate — what banks charge each other for short-term loans — now sits in a range of 5.25% to 5.5%. Most economists polled by FactSet expect the Fed to leave that rate unchanged until its September meeting.

The Fed's last hike was in July 2023, when the benchmark rate was brought to its current level. Starting in early 2022, the central bank ratcheted up interest rates to combat the hottest inflation in 40 years, which hit a peak of 9.1% in June 2022. Since then, inflation has fallen to about 3% on an annual basis.

How much could interest rates be cut in 2024?

That will depend on economic trends over the next weeks and months, with the Fed monitoring numerous data points, ranging from inflation to the monthly jobs report.

Economists are penciling in a Fed rate cut of 0.25 of a percentage point in September, which would trim the benchmark rate to a range of 5% to 5.25%.

"At the moment, a modest cut of 25 basis points in September seems likely. If that goes well, we could even see two additional 25 basis point cuts before 2024 comes to an end," said Jacob Channel, chief economist at LendingTree, in an email. "Cuts are far from guaranteed, however. Remember, the Fed is designed to pivot quickly should something unexpected happen."

Slightly more than half economists are predicting the benchmark rate will be cut to a range of 4.5% to 4.75% by December, according to FactSet.

What is the Fed's rate decision based on?

The Fed has a twofold policy goal, also called the dual mandate — to keep prices stable and to ensure maximum employment.

Inflation continues to cool, reflecting that the prices of goods and services are rising at a progressively slower rate since their 2022 peak. At the same time, the Fed is closely watching employment data. Because rate hikes are designed to slow the economy and tame inflation, they can also cast a pall over hiring.

And there are signs the labor market is cooling, as the Fed has intended. Job growth has averaged a solid, but unspectacular, 177,000 a month for the past three months, down from a red-hot three-month average of 275,000 a year ago.

Powell and other Fed officials have underscored that they're paying nearly as much attention to the threat posed by a hiring slowdown as they are to inflation pressures. That shift in the Fed's emphasis toward ensuring that the job market doesn't weaken too much has likely boosted market expectations for a rate cut.

But some economists and policy experts believe the Fed has already waited too long to cut rates, citing weakening job numbers and cooling inflation. Some also say that high interest rates are making affordable housing out of reach for many.

"The Fed should start cutting rates this week — any delay risks damaging the labor market," said Bharat Ramamurti, senior advisor for economic strategy at the American Economic Liberties Project and former deputy director of the National Economic Council, on a conference call with reporters to discuss the Fed's meeting this week.

And some experts are urging the Fed to cut by 0.5 percentage points, which would be a reduction that's twice as large as most economists are forecasting.

"They can bring down costs for American families," said Kitty Richards, senior fellow at the Groundwork Collaborative and a former Treasury official, on the same call. "I would go further than 50 basis points — if you think the Fed went too high, they can cut more aggressively as well."

What would a rate cut mean for your money?

There could be some relief for borrowers in the months ahead, experts say. Already, mortgage rates have downshifted to just under 6.8% today after hitting 7.2% in May.

"At first glance, a decline of 0.44 percentage points may not seem like a big deal. But, in mortgage land, a 44 basis-point drop is nothing to scoff at," saving about $100 a month in payments for buyers of a $350,000 home, Channel noted.

Rates could trend toward the 2024 lows, ending the year closer to 6% for a 30-year fixed mortgage, he predicted.

Credit card companies could lower their APRs in response to cuts from the Fed, said LendingTree credit analyst Matt Schulz. The average interest rate on a new credit card now at 24.84%, the highest since LendingTree started tracking rates in 2019.

"If the Fed cuts rates by a quarter-point, dropping the APR to 24.59%, you'll save $21 and take 1 less month to pay off," he said. "That's not nothing, but it is far less than what you could save with a 0% balance transfer credit card."

—The Associated Press contributed to this report

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