If you were holding out for lower interest rates on credits cards or mortgages, expect to only see modest relief for the remainder of the year and much of 2025.
That's because the Federal Reserve is keeping its benchmark interest rate steady to discourage borrowing, which it will do until there's more evidence that inflation is under control.
Unfortunately for borrowers, inflation isn't under control — at least, not quite yet.
While the annual inflation rate has fallen from a peak of 9.1% in June 2022, it's been hovering closer to 3% for the past 10 months. That's still above the Fed's target rate of 2%.
On Wednesday, inflation remained mostly in line with expectations, ticking up 0.3% in April after increasing by 0.4% in March, according to the latest data from the consumer price index. The year-over-year inflation rate is now 3.4% — down slightly from 3.5% in March.
While inflation seems to be trending in the right direction, there's still a long way to go considering how hard it's been to get down to 2%. For that reason, the central bank is expected to keep interest rates relatively high well into 2025.
How interest rate cuts will play out
The Fed's current benchmark lending rate is a range between 5.25% and 5.5% — the highest it's been in 23 years. This rate influences what you pay in interest for loans, credit cards, auto financing and, indirectly, what you pay for mortgages, too.
Most forecasts predict two 0.25 percentage point cuts by the end of the year, with the first cut expected in September. That would bring the federal funds rate to 4.75% to 5%.
Don't expect rates to start dropping much faster after that. By April 2025, there's a 80% probability that the Fed's rate will be 4% or higher, according to the CME FedWatch tool, which uses futures pricing to predict rates.
That's in line with the forecast provided by PNC Financial Services Group, a financial firm that expects the Fed's rate to stay above 4% "through 2025 and beyond."
A rate of 4% will be "considered the long-term equilibrium rate — or 'neutral' rate — at which the U.S. economy will be neither stimulated nor restricted by interest costs," says Kurt Rankin, PNC's senior economist.
Moody's Analytics has a more optimistic forecast, projecting benchmark interest rates in the "high-3% area" by the end of 2025. However, the Fed will need to see "several more months of encouraging disinflation" before it makes cuts, says Matt Colyar, an economist with the company.
Either way, don't hold your breath waiting for the Fed's interest rates to drop back below 3%, like they were in the years leading up to 2022.
The economic climate "will mean higher interest rates for consumers, no doubt about it," says Doug Carey, a chartered financial analyst and president of WealthTrace. "We should be telling borrowers to prepare for higher rates and that we're not going back to 2020's rates any time soon."
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FAQs
Additionally, many economists expect the Fed to continue to cut throughout 2025, with most forecasting that by May 2025, the benchmark rate will stand between 3% to 3.5%, according to FactSet.
Why are credit card rates allowed to be so high? ›
Card rates are high because they carry more risk to issuers than secured loans. With average credit card interest rates above 20.7 percent, the best thing consumers can do is strategically manage their debt. Do your research to make certain you're receiving a rate that's on the lower end of a card's APR range.
Why do credit card interest rates keep going up? ›
Key takeaways. Your credit card APR can go up if the prime rate changes, you paid your credit card bill late, your intro APR offer ended or your credit score dropped. If your APR increases, you can work on paying down your balance or transfer your balance to a card with a low or 0 percent intro APR offer.
Why do longer mortgages have higher interest rates? ›
Higher interest rate: With a 30-year mortgage, most borrowers will have a higher interest rate than shorter-term fixed-rate mortgages. The longer a lender has to wait to be repaid, the bigger they deem the loan a risk, so they charge higher interest rates.
Where will mortgage rates be in 2025? ›
In January 2025, I predict the average 30-year mortgage rate will be about 6%, not too far below where it is right now. By December 2025, I predict the average 30-year mortgage rate will fall to approximately 5.1%, which would make a big difference in the cost of homeownership.
Why are mortgage rates going up? ›
We began raising interest rates at the end of 2021 to help slow inflation - the rate at which prices are rising. It is working. Inflation has fallen a lot, and is now at our 2% target. Inflationary pressures have eased enough that we've been able to cut interest rates from 5.25% to 5%.
Why interest rates on credit cards tend to be the highest? ›
Retail credit cards typically have higher interest rates for a few reasons. Store cards tend to have lower credit requirements, so to offset any risk to card issuers, they often have higher rates.
Why is my interest rate so high on a mortgage? ›
Lenders charge higher interest rates when the risk of default increases, which is also the case with low down payments. For example, if you make a 3% down payment on a $200,000 loan, you put down $6,000. But if you make a 20% down payment on a $200,000 loan, you put down $40,000.
Why is credit card debt so high right now? ›
While many Americans made progress in paying down their debt during the pandemic, surging inflation helped reverse this positive trend in recent years, leaving millions relying on their cards to cover the basics and resulting in a sharp increase in defaults, with delinquency rates in 2023 coming in two percentage ...
What year had the highest mortgage interest rates? ›
What's the Highest Mortgage Rate in History? From 1971 to present, the highest average mortgage rate ever recorded was 18.63% in October 1981.
Mortgage rates should continue declining this year as the U.S. economy weakens, inflation cools and the Federal Reserve cuts interest rates. The 30-year fixed mortgage rate is expected to fall to the low-6% range through the end of 2024, potentially dipping into high-5% territory in 2025.
Do 25 year mortgages exist? ›
With a 25-year fixed, you'll pay off your home loan over 25 years instead of the standard 15 or 30 years. Since it's a fixed mortgage, you can count on the same principal and interest rate for the life of the loan.
How high will interest rates be in 5 years? ›
Projected Interest Rates In The Next Five Years
Then, 3.5% in the third, and 3.25% in the final quarter of 2024. In 2025, ING predicts a further decline to 3%. The University of Michigan inflation expectations in the U.S. for the five-year outlook were revised slightly higher to 3% in August 2023.
What will interest rates be in 2026? ›
CPI inflation to fall further than most expect in 2025 and prompt BoE to cut interest rates to 3.00% by early 2026 | Capital Economics.
Will mortgage rates ever be 3% again? ›
Lawrence Yun, chief economist at the National Association of Realtors, even told CNBC last year that he doesn't think mortgage rates will reach the 3% range again in his lifetime.
What will the mortgage interest rate be in 2026? ›
Leading forecasts suggest that by 2026, the average mortgage rate could drop to around 5.0% according to various sources, including the predictions shared by financial analysts on platforms such as Morningstar. They suggest a gradual decline will continue, culminating in rates around 4.5% to 4.25% by 2027.
