Fed keeps interest rates high at March meeting and Wall Street hits record highs

Two years after the Federal Reserve launched its first rate hike in the fight against inflation, the Fed held steady Wednesday and delayed cutting interest rates once again.

Right now, the best guess, according to various forecasts, is that the Fed will start cutting short-term interest rates in June. And the expectation remains that the Fed could cut rates three times in 2024.

Wall Street hit a triple-record day, closing at new highs for the Dow Jones Industrial Average, the Standard & Poor's 500 Index and NASDAQ.

The Dow rose 401.37 points, up 1.03%, Wednesday to close at 39,512.13 points.

The S&P 500 gained 46.11 points, up 0.89%, Wednesday to close at 5,224.62 points.

The NASDAQ composite index gained 202.62 points, up 1.25%, to close at 16,369.41 points on Wednesday.

Auto stocks took off on Wednesday, too. Ford Motor Co. closed at $12.90 a share, up 60 cents or 4.88%. General Motors closed at $42.85 a share, up $1.34 a share or 3.23%. Stellantis closed at $29.36 a share, up 54 cents or 1.87%. Auto stocks got a boost after the Biden administration on Wednesday eased some proposed emissions rules, giving automakers more time to address tighter standards.

Overall, Wall Street traders apparently took comfort in the Fed's outlook. The Fed sees economic growth slowing in 2024 but the economy could be better than some had thought earlier. The Fed expects the nation's gross domestic product to grow at 2.1% over the course of 2024. That's down from 3.1% for 2023 overall.

Some speculated that traders also were pleased that the Fed indicated it would stay on course for three projected rate cuts for 2024, and not pull back to two rate cuts or fewer.

Fed acknowledges risks with timing a rate cut

On Wednesday, the Federal Reserve concluded that the economy has been growing at a “solid pace,” job gains have remained strong, and inflation has “eased over the past year but remains elevated.”

The Fed said it remains “highly attentive to inflation risks” and wants to bring inflation back to a 2% level over the longer run.

Fed Chair Jerome Powell acknowledged in a news media briefing Wednesday that there are risks in timing a rate cut. "We’re in a situation where if we ease too much or too soon, we could see inflation come back," Powell said.

Yet, if the Fed waits too long to cut rates, he noted, the risk is that the jobless rate could go up.

For now, the Fed is sitting tight on rates.

Blame the latest rate cut delay on hot inflation reports for January and February, according to Mark Zandi, chief economist for Moody's, who says the Fed will wait another three months to cut rates. The two-day Fed meeting will be held June 11 and June 12.

Consumer prices rose 0.4% on a month-over-month basis in February, after rising 0.3% in January, according to data released by the U.S. Bureau of Labor Statistics on March 12. The consumer price index rose 3.2% year-over-year in February.

Many consumers would like relief from extraordinarily high interest rates on their credit cards and other loans. Steady cuts in interest rates certainly would help sell cars and trucks by driving down what consumers pay for auto loans.

Yet, economists say the Fed is reluctant to hit the gas, if you will, and drive inflation even higher by cutting interest rates too soon.

"The Fed would rather slow-roll rate cuts and slow the economy more than necessary than cut too quickly and risk inflation rebounding," said Bill Adams, chief economist for Comerica Bank.

The Fed's most likely path, Adams said, is a first rate cut in June. Adams expects two more rate cuts after that in 2024, one in September and another in December. He expects the federal funds target to be in a range of 4.5% to 4.75% by the end of 2024.

Currently, the federal funds rate — which directly influences a variety of rates including those on credit cards, private student loans, small business loans and home equity lines of credit — remains in a target range of 5.25% to 5.5%.

Consumers, though, find themselves in a tight spot, as they continue to deal with high prices and the high cost of borrowing. We just saw the two-year anniversary of the first rate hike by the Fed. On March 16, 2022, the Fed raised short term rates by a quarter of a percentage point to put the federal funds rate in a range between 0.25% to 0.5%.

The Fed repeatedly raised interest rates in 2022 and 2023 to slow down borrowing as inflation skyrocketed to levels not seen in 40 years.

Back in February 2022, the Consumer Price Index had jumped 7.9% year-over-year. Shoppers couldn't imagine how prices climbed so rapidly for gas, food, rent, airline tickets, used cars and trucks, and new vehicles.

Ultimately, the Fed raised short term interest rates 11 times with the last rate hike hitting in July 2023. The Fed's actions in Washington put a bull's-eye on America's wallets.

Consider the two-year upward trend, based on data from Bankrate.com, for these rates:

Credit cards: The average credit card rate is now 20.75% — up from 16.34% two years ago on March 15, 2022, the day before the first rate hike.

Five-year new car loan: The average rate was 7.87% as of March 15, up from 3.98% two years ago.

Home equity line of credit: The average HELOC rate had climbed to 8.98% as of March 15, up from just 3.96% two years ago. "We used to think of this as a low-cost form of borrowing; not anymore," said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com. Home prices, he said, have gone up significantly in many communities, so many consumers are sitting on substantial home equity. Many homeowners might be tempted to tap into their equity and borrow against their homes, maybe to do a bathroom remodel, but the interest rates could be a turnoff.

Car loan rates at nearly 24-year high

Jonathan Smoke, chief economist for Cox Automotive, noted in a report March 19 that consumers have hit the pause button when it comes to spending and charging more on their credit cards. But both new and used car sales proved strong in February and March, thanks to a boost from tax refunds.

The average federal income tax refund was $3,145 so far this year through March 8, up 5.8%, according to the latest data from the Internal Revenue Service. The tax season started about a week later than last year and the total number of refunds issued through March 8 is down 12.5.% from the same time frame a year ago.

Smoke warned that all is not positive for auto sales in the weeks ahead, given that interest rates for auto loans are at nearly 24-year highs. Demand for new and used cars will soften, he predicted, once the tax refund season is over.

Consumers, he said, could decide to put off buying a car or truck if they're anticipating that interest rates will fall in 2024. "There is no urgency to buy if the message is that rates will be lower in six months," Smoke told the Detroit Free Press.

The longer the Fed waits to cut rates and give more guidance about future rate cuts, Smoke said, the more consumers could delay big purchases. Some companies could see declines in consumer spending on credit-sensitive goods, such as cars and trucks, as consumers play a wait-and-see game about interest rates.

Smoke expects three rate cuts of a quarter point each — totaling 75 basis points — in 2024. The first rate cut, he said, is likely to be announced after June meeting. He expects another rate cut in September, and then in November.

It remains possible, he said, that Fed policymakers could pull back and instead suggest only two rate cuts for 2024.

But signs of slowing consumer spending and weakening employment conditions, Smoke said, indicate that "waiting beyond June would be a mistake."

After the June meeting, the next scheduled Fed meeting is July 30 and July 31.

Many consumers with strong credit histories can shop around and find auto manufacturers offering interest rates of 3% or lower on some cars and trucks, Smoke said. On average, though, rates are much higher.

The average new auto loan interest rate that consumers obtained so far in March increased to 9.7%, up 80 basis points year over year. The average new rate peaked just below 10% in mid-October 2023.

The average used auto loan rate has declined by a quarter of a point so far in March to 14.3% from a 24-year peak of 14.6% in February. The average used car rate is currently up 30 basis points year over year.

The potential exists for auto loan rates to drop as much as a full percentage point in the second half of 2024 from current levels, Smoke said, once the Fed starts cutting the short-term federal funds rate.

Savers are starting to see interest rates pull back

Savers, of course, may want to lock in higher rates now, especially if interest rates decline in the future.

When it comes to savings rates, interest rates on long-term certificates of deposit have been gradually trending down early in 2024, as banks anticipate Fed rate cuts. Savers are still seeing attractive rates, experts say, but there clearly has been some pullback overall.

"Banks are under pressure to improve profitability. Cutting deposit rates is one way to do this," said Ken Tumin, who founded DepositAccounts, which is now part of LendingTree. The site tracks and compares bank rates.

One-year CD rates offered through 10 well-established online banks fell more in January and February than any previous two-month period since 2020, Tumin said.

The average one-year CD yield offered through online banks fell from an average 5.35% to 5.02% as of March 1.

Longer term CD rates have fallen significantly from the fall of 2023. The top-yielding five-year CD is 4.61%, down from 4.85% in October, according to Rossman's review of Bankrate.com data.

How much interest rates change this year, of course, will depend on how well inflation cools down and other economic factors. If inflation continues to surprise on the upside, experts say, the rate cuts will come later in 2024 and be more limited.

Economists aren't forecasting a recession or financial crisis in 2024. But significant global and financial disruptions remain possible and then, the Fed could act far more quickly to cut interest rates than anyone's predicting now.

"As a saver who has been through two financial crises that have led to the Fed slashing rates to near zero, you learn that high rates can plummet quickly," Tumin said.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.

This article originally appeared on Detroit Free Press: Fed delays cutting interest rates in March: When's the rate cut?