Why Mortgage and Credit Card Rates Could Remain High Until 2025

Mortgage and credit card rates may stay high until 2025 due to ongoing economic factors and financial trends. Persistent inflation, Federal Reserve policies, and market uncertainties contribute to elevated interest rates, impacting consumers and borrowers for the next few years.

If you were hoping for lower interest rates on credit cards or mortgages, expect only modest relief for the rest of the year and much of 2025.

This is because the Federal Reserve is maintaining its benchmark interest rate to discourage borrowing until there’s more evidence that inflation is under control.

Unfortunately for borrowers, inflation isn’t fully under control yet.

While the annual inflation rate has decreased from a peak of 9.1% in June 2022, it has been hovering around 3% for the past 10 months, which is still above the Federal Reserve’s target of 2%.

On Wednesday, inflation largely met expectations, rising by 0.3% in April after a 0.4% increase in March, according to the latest consumer price index data. The year-over-year inflation rate is now 3.4%, slightly down from 3.5% in March.

Although inflation is trending in the right direction, it remains challenging to reach the 2% target. As a result, the central bank is expected to maintain relatively high interest rates well into 2025.

How interest rate cuts will play out

The Federal Reserve’s current benchmark lending rate is between 5.25% and 5.5%—the highest in 23 years. This rate affects the interest you pay on loans, credit cards, auto financing, and indirectly, mortgages.

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

However, don't expect rates to drop quickly after that. According to the CME FedWatch tool, which uses futures pricing to predict rates, there’s an 80% probability that the Fed’s rate will be 4% or higher by April 2025.

This aligns with the forecast from PNC Financial Services Group, which expects the Fed's rate to stay above 4% “through 2025 and beyond.”

Kurt Rankin, PNC’s senior economist, explains that a 4% rate is considered the long-term equilibrium or "neutral" rate, at which the U.S. economy will be neither stimulated nor restricted by interest costs.

Moody’s Analytics offers a more optimistic forecast, predicting benchmark interest rates in the "high-3% range" by the end of 2025. However, the Fed will need to see "several more months of encouraging disinflation" before making cuts, according to Matt Colyar, an economist with the company.

Regardless, don't expect the Fed's interest rates to drop back below 3%, as they were before 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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Source: CNBC‍