Will Interest Rates Go Down in 2023?

Inflation has been wreaking havoc on consumers since the latter part of 2021, and the Federal Reserve has been doing its best to fight it. To that end, the central bank has raised interest rates nine times since early 2022. Those rate hikes have driven up the cost of borrowing, forcing consumers to pay more for everything from personal loans to auto loans to credit card balances.

See, the Fed needs consumer spending to slow down in order for inflation to cool. Inflation is generally the byproduct of an excess of consumer demand relative to supply. A good way to narrow that gap is to push consumers to spend less. 

Rate hikes achieve this goal by not only making it more expensive to borrow money, but also, by leading to higher interest rates for savings accounts and CDs. When it becomes more attractive to save money, consumers tend to spend less of it.

But the Fed isn't done fighting inflation. And because of that, consumers should not expect interest rates to drop in 2023. However, rates may also not climb much from where they are today.

Where things stand with inflation

In June 2022, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, was up a whopping 9.1% on an annual basis. In March, the CPI was up just 5% on an annual basis.

Clearly, that's a major improvement. But it's also not where the Fed wants inflation to be.

The Federal Reserve has long targeted 2% as its ideal rate of annual inflation. That rate, the central bank believes, tends to lend to a stable economy. Because the most recent CPI reading is still a ways off from 2%, we shouldn't expect the Fed to lower interest rates anytime soon.

In fact, in late March, the Fed issued a statement that said, "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run...The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

Since the Fed isn't backing down on its 2% inflation target, we should not expect interest rates to decline until inflation is much closer to that point, or even at that point. Now, it may be that inflation manages to go from 5% to 2% within the course of the next seven months or so. But it's not going to happen overnight, and there's a good chance we won't see 2% inflation at any point in 2023.

How to cope with higher interest rates

Because it's gotten so expensive to borrow money, a good bet these days is to avoid taking out a loan if you can avoid it. If your car gives out on you and you need a new one to function, then an auto loan, for example, might be unavoidable. But 2023 may not be the best year to borrow money to renovate your house if the work at hand isn't crucial.

At the same time, if you can, try to capitalize on today's higher interest rates by putting more money into the bank. Seeing as how there are still rumblings about a potential 2023 recession, it's a good time to boost your emergency fund. And the more cash you keep in a savings account, the more interest you stand to rack up.