Mortgage, credit card and other borrowing costs likely to remain high into 2025

Unfortunately for borrowers, inflation is not under control—at least not yet.

While annual inflation has fallen from a peak of 9.1% in June 2022, it has hovered around 3% for the past 10 months. That's still above the Fed's 2% target rate.

On Wednesday, the latest data from the Consumer Price Index showed that inflation was largely in line with expectations, rising 0.3% in April after rising 0.4% in March. Currently, year-on-year inflation is 3.4%, down slightly from 3.5% in March.

While inflation appears to be heading in the right direction, there is still a long way to go given the difficulty of getting it down to 2%. Therefore, the central bank is expected to keep interest rates relatively high until 2025.

The Federal Reserve's current benchmark lending rate is between 5.25% and 5.5%, the highest level in 23 years. This rate affects the interest you pay on loans, credit cards, car financing and, indirectly, how much you pay on your mortgage.

Most forecasts expect two 0.25 percentage point rate cuts by the end of the year, with the first expected in September. This would bring the federal funds rate to 4.75% to 5%.

Don't expect rates to start falling faster after this. According to CME's FedWatch tool, which uses futures pricing to predict interest rates, there is an 80% chance that the Fed's interest rate will be 4% or higher by April 2025.

That's consistent with forecasts provided by financial firm PNC Financial Services Group, which expects Fed rates to remain above 4% “through 2025 and beyond.”

Kurt Rankin, senior economist at PNC, said a 4% interest rate would “be considered the long-run equilibrium rate, the 'neutral' rate, where the U.S. economy is neither stimulated nor constrained by interest costs.”

Moody's Analytics' forecast is more optimistic, predicting that the benchmark interest rate will reach “a high of 3%” by the end of 2025. deflation”. Colyar is an economist at the company.

Regardless, don't hold your breath waiting for Fed rates to fall back below 3%, as they have been in the years leading up to 2022.

Doug Carey, a chartered financial analyst and president of WealthTrace, said the economic environment “will undoubtedly mean higher interest rates for consumers.” “We should be telling borrowers to prepare for higher rates and that we are not going back to 2020 rates anytime soon.”

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