Chances are, filling up on gas or buying groceries has been harder on your wallet lately. Since the pandemic, inflation has grown so quickly that the nation’s central bank, the Federal Reserve, has been working on slowing it down.

The Federal Reserve’s main tool to fight inflation is to increase interest rates — the cost of borrowing money. By setting interest rates at their highest levels in 22 years, the Federal Reserve has risked tipping the US into a recession. 

Fortunately, we managed to escape that fate in 2023, and the economy grew more than expected. 

So, what does 2024 hold? 

Inflation and interest rates should come down. This is good news for investors and everyone who is tired of rising prices. Unfortunately, there’s still uncertainty. We’re entering a presidential election year, the economy is cooling, and conflicts continue overseas.

Here are the financial trends we’ll be watching in 2024.

Slowing inflation, job market, and the economy

The battle for 2% inflation 

What happens to interest rates depends on inflation. Why does this matter?

Interest rates affect everything from mortgage and car payments to the cost of doing business. Higher rates make house and car payments on new purchases go up. Your savings account also pays more interest than it used to. The idea is to get people to save more and spend less so that prices don’t keep going up faster. 

In 2022, inflation, as measured by the Consumer Price Index (CPI), reached a four-decade high. But it shrank quickly last year as the Federal Reserve increased interest rates. From November 2022 to November 2023 the CPI decreased by more than half to 3.1%.

Although most economists agree inflation has peaked, obstacles remain. Most prices are growing at a slower rate, but the Fed is closely watching “sticky” prices for categories like housing, healthcare, and eating out — prices that have stayed high because they take longer to change. 

In 2024, the hope is that the gradual decrease in inflation will continue. The Fed doesn’t see inflation falling back to its 2% target until 2026. Prices most likely won’t come down, but they shouldn’t rise at the breakneck speeds we saw in 2022 either. 

As inflation measures improve, the Fed will have more room to start cutting interest rates.

Unemployment may start inching up

A big reason for high interest rates has been inflation caused by a healthy job market. It’s no secret that the employment market remained strong after the pandemic. 

Unemployment rates measure the number of people who are actively looking for a job but can’t find one. These rates have reached and stayed near a five-decade low.   

In 2024, that may change. Hiring is slowing down, raises are getting smaller, and it’s already tougher to find a job after getting laid off. Most analysts don’t expect the job market to unravel, but unemployment could start ticking up.  

GDP growth will likely moderate

Gross domestic product (GDP) measures the total value of goods and services a country produces, making it a handy measure of economic health. Official numbers for 2023 aren’t in yet, but the US economy has been surprisingly strong all year.

In 2024, that growth will likely shrink because of stubborn inflation and high interest rates. Most economists, including those at the Federal Reserve, expect a slowdown.

Factors that could put a lid on growth include:

  • Federal Reserve policies keeping interest rates higher for longer
  • Persistent inflation above the 2% target
  • Declining household savings and consumer spending
  • Rising household debt

If GDP growth slows too much in 2024, that could signal a recession. That risk remains. Yet, if the economy weakens, the Fed might step in and cut interest rates earlier than expected. Look for 2024 to be a watch-and-wait game as the Federal Reserve keeps a close eye on US production.

Aiming for a soft landing

Ideally, the Federal Reserve wants to slow the economy just enough to keep inflation rates under control while avoiding a recession, achieving what’s known as a “soft landing.”

Soft landings after big interest rate increases aren’t common. But the Fed seems close to reaching its goal because of:

  • A strong job market
  • Contained bank collapses in early 2023
  • Above-average consumer financial health
  • Government spending 

Until it succeeds, the Fed is still operating within a “Goldilocks” dilemma. If it loosens monetary policy too quickly, inflation could come roaring back to life. On the other hand, raising interest rates too much could cause a full-blown recession. 

In 2024, the Fed will do its best to keep the US economy in that “just right” sweet spot in the middle — finding a healthy balance between inflation rates and interest rates.

Housing relief

Another casualty of increasing rates has been the housing market. Many people can’t afford to buy a home because house prices and mortgage rates have gone up. 

2024 probably won’t turn that reality upside-down — but the market may get better. 

Mortgage rates may dip

As interest rates stabilize, experts expect mortgage rates to slip from around 7% to the 6.5–6.8% range. Again, these changes depend on what the Federal Reserve does and how the market reacts. If the Fed keeps interest rates steady for longer, mortgage rates may not drop much. If, however, the Fed starts lowering rates in 2024, mortgage rates are expected to follow suit.   

A buyer’s market

Real estate brokers predict that housing prices could inch down in 2024. 

High mortgage rates have been an effective showstopper so far. Listings have stayed on the market longer because homes are taking longer to sell. People who’ve locked in much lower mortgage rates on their homes may also be reluctant to sell. 

If mortgage rates and home prices start to come down, we could see more competition and sales. We might also see more homes available for sale, including both existing and newly built ones. However, brokers don’t expect a big spike in the number of homes listed.

Already, sellers have tried to respond to high interest rates. 35% of home sales between August and October 2023 included seller concessions. Concessions attract buyers by offsetting repair, closing, and/or mortgage rate costs. High housing costs mean we’ll probably continue to see concessions.

Still, 2024 probably won’t look like a buyer’s market to everyone. The buying power of prospective homeowners has been cut by half since 2021. It may come as no surprise that housing affordability remains at record lows.

Peak interest rates

A cooling housing market could cause inflation to decline. This paves the way for the Fed to cut interest rates in 2024. 

So far, officials estimate they may cut interest rates three times. The timing and speed of the cuts will depend on multiple factors like inflation data, unemployment numbers, and salary growth. 

Experts are divided on when rate cuts will happen. For starters, the Fed decided not to increase interest rates again in December. In the new year, the market expects a roughly 65% chance that the Fed will cut interest rates by March, meaning we’ve probably reached the end of the cycle of increasing interest rates. 

Bonds bring attractive income

If interest rates stabilize or fall, bond owners may experience rising bond prices. When rates go down, bond prices go up. At the same time, investors can still earn income from the interest that bonds pay. 

Guaranteed interest income from bonds appeals to investors worried about a slowdown. Investors often look for safe haven investments during uncertain times. This is usually good for bonds. 

Cash no longer king

In 2023, some savings accounts were paying as much as 5% or 6% in interest. As a result, investors piled a record $1.1 trillion into cash holdings.  

However, investors might shift away from holding cash when the Fed cuts interest rates. Instead, they may chase higher performance in other markets. In the past, a pause in interest rate hikes has led to double-digit percentage gains in stock markets.

Riskier assets could enjoy more popularity if the Fed cuts rates earlier than expected. Already, stocks managed to rise double-digits in 2023, while bonds have also made money.

The 60/40 portfolio: A comeback?

Investors commonly use the 60/40 portfolio for diversified investing. Its simple formula, 60% stocks and 40% bonds, can provide stability and growth. When stocks and bonds move in opposite directions, losses in one asset may offset gains in the other. You can also adjust the percentages according to your risk tolerance, goals, and time horizon.

The last few years threw the 60/40 portfolio a curveball. Higher inflation and interest rates shattered the typical pattern between stocks and bonds. Instead, stocks and bonds often moved together. Sometimes, both experienced losses. The 60/40 portfolio fell out of favor, leaving investors searching for greener pastures.

As markets celebrate the end of interest rate hikes, the 60/40 portfolio may get another look.
Goldman Sachs predicts a 6–8% performance for the 60/40 portfolio in 2024. This is higher than its estimates for performance on stocks — specifically the benchmark S&P 500 Index. 

2024: Preparing for uncertainty

Although the Fed has managed to pull off a soft landing so far, the coming year raises new questions. Remember the increased government spending during the pandemic? That support is over, and now lawmakers are arguing about how to pay the bills. Congress must pass spending bills to prevent a government shutdown in early 2024, during an election year. 

The Fed will likely start lowering interest rates, which could bring relief to investors and consumers. However, the timing of these changes can shake up markets. Navigating bumpy market conditions will require carefully planned investment strategies.

Need to prepare for changing market conditions? Track your finances with Quicken and invest with confidence.