Most Americans are concerned about rising living costs due to years of sustained inflation. When inflation reached 9.1% in June 2022, the Federal Reserve aggressively raised interest rates to curb inflation.
Increasing the cost of borrowing helped cool inflation to below 3% over 2023 and 2024, but consumer prices remain high, and most households are grappling with how to budget for inflated prices.
While deflation — a decrease in the cost of goods or services — is possible, it isn't easy to achieve, meaning increased prices are likely here to stay.
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Although the Fed’s fiscal policy initially drove inflation toward the year-end goal of 2%, inflation has started to creep back up.
Another interest rate cut announcement was expected after the upcoming December 18th Federal Reserve board meeting, but rising inflation and political uncertainty called the likelihood of a third rate cut this year into question.
However, most experts note that another 0.25% interest rate cut is very likely, a surprising move after two years of consistent rate hikes. A third rate cut this year could restore confidence in the housing market and give slight relief to borrowers going into 2025.
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Interest rate cut may improve housing market confidence, but inflation remains a concern
CME FedWatch predicts a 95% chance of the Fed cutting rates down 0.25% to approach a 4.25% - 4.5% target range. While experts disagree on what another interest rate cut will mean for the economy, rate cuts tend to improve consumer confidence.
However, inflation is still the top concern for most households, and many Americans have yet to see tangible results from the interest rate cuts over the past few months.
Almost half of all Americans (44%) think that the Fed has mismanaged inflation, and nearly 90% believe that inflation is still a problem. Though there is a chance that a third interest rate cut could foster economic activity and increase inflation, it could also benefit consumers — specifically borrowers.
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Credit card interest rates will likely decline by 0.25%, mirroring the same decrease as the Federal Funds Rate. This change could save credit cardholders $1.88 billion in interest over the next year.
While mortgage lenders have likely already priced another interest rate cut into mortgage rate offerings, a third cut has saved home buyers an estimated 0.11% on their mortgage rates. This translates to over $10,000 on a 30-year mortgage for an average mortgage loan of $409,942.
Interest rate cuts have slowly created modest improvements for consumers, but home buyers may need more time to see mortgage rates come down noticeably. In the meantime, consumers remain focused on inflation and how surging prices have affected their quality of life.
Consumers are wary of inflation heading into 2025
Inflation eased significantly in 2024, but most households have felt stretched financially despite improvement. The cost of groceries, housing affordability, and gas prices were hot topics in the 2024 presidential election, with Donald Trump promising to bring down prices for consumers.
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Not only is deflation very difficult to achieve, but the incoming Trump administration has proposed several policies that could exacerbate inflation. Tariff trade wars and aggressive deportation policies are now of particular concern: nearly 75% of Americans are worried that tariffs will worsen inflation.
However, Fed chair Jerome Powell has reiterated that the new presidential administration will not influence the Fed's fiscal approach — at least not immediately.
"I think it's too early to reach judgments,” Powell said at a Federal Reserve event in November. “We have time to make assessments about what the net effects of policy changes will be on the economy before we react with policy.”
While Trump's policies could increase inflation, the Fed isn’t planning for any changes until the policies enacted are solidified. Still, consumers should expect fewer interest rate cuts in 2025, as inflation has begun to inch back toward 3% (2% is considered optimal).
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