Rising Inflation and Interest Rate Adjustments: What It Means for Americans
Many Americans are feeling the pinch of rising living costs, largely due to inflation that has persisted over the years. When inflation hit a high of 9.1% in June 2022, the Federal Reserve took action by significantly increasing interest rates to bring inflation under control.
The strategy of raising borrowing costs helped reduce inflation to below 3% during 2023 and 2024. However, consumer prices have not fallen, leaving many people struggling to manage their budgets amidst these inflated costs.
Although deflation, which is a decrease in the cost of goods and services, is theoretically possible, it is challenging to achieve. This suggests that the current high prices are likely to persist.
The Federal Reserve’s policies initially aimed to lower inflation to a target of 2% by the end of the year, but inflation has begun to rise again. While a new interest rate cut was anticipated following the Federal Reserve’s meeting on December 18th, the rising inflation and political uncertainties have cast doubt on the likelihood of a third rate cut this year.
Despite this, most experts believe a 0.25% rate cut is still likely, marking a surprise shift after two years of steady rate increases. This potential cut could boost confidence in the housing market and provide some relief to borrowers as we head into 2025.
Interest Rate Cuts and Consumer Confidence
According to CME FedWatch, there is a 99% probability that the Fed will reduce rates by 0.25%, aiming for a target range between 4.25% and 4.5%. While experts have differing opinions on the implications of another rate cut for the economy, such cuts generally tend to enhance consumer confidence.
Inflation remains a significant concern for most households, and many Americans have yet to notice any concrete benefits from recent interest rate reductions. Nearly half of Americans (44%) believe that the Federal Reserve has mishandled inflation, and almost 90% still consider it a problem. Although a third rate cut might stimulate economic activity and potentially increase inflation, it could also offer benefits to consumers, especially borrowers.
For instance, credit card interest rates are expected to decrease by 0.25%, which could save credit cardholders approximately $1.88 billion in interest over the next year. Even though mortgage lenders have likely already incorporated another rate cut into their offerings, a third cut could save homebuyers an estimated 0.11% on their mortgage rates, translating to over $10,000 on a 30-year mortgage for an average loan of $409,942.
Although these interest rate cuts have led to modest improvements for consumers, homebuyers may still need more time to see a significant drop in mortgage rates. Meanwhile, consumers continue to focus on how inflation and rising prices are affecting their quality of life.
Consumer Concerns About Inflation Heading into 2025
While inflation eased considerably in 2024, many households still feel financially stretched. The costs of groceries, housing, and gas were major issues during the 2024 presidential election, with Donald Trump pledging to reduce prices for consumers.
The prospects of deflation are slim, and policies proposed by the incoming Trump administration could potentially worsen inflation. Tariff trade wars and aggressive deportation policies are of particular concern, with nearly 75% of Americans worried that tariffs could exacerbate inflation.
Federal Reserve Chair Jerome Powell has emphasized that the new administration’s policies will not immediately influence the Fed’s approach. "It’s too early to make judgments," Powell stated at a November Federal Reserve event. "We have time to assess the net effects of policy changes on the economy before we react."
While Trump’s policies might increase inflation, the Fed does not plan on making changes until the policies are firmly in place. Consumers should expect fewer interest rate cuts in 2025, as inflation is slowly inching back toward the 3% mark, with 2% being the ideal target.
