What happens when there’s a prevalent anticipation for lower interest rates from the Federal Reserve? Investors seek to play such a beneficial trend, with lower mortgage rates and a surging stock market evidence of such an outlook. However, the economic consequences are significant when considering any detours from this estimate, like a rise in rates that nobody saw coming.

After the pandemic, the Federal Reserve raised interest rates 11 times to slow down price increases. Fed officials meant to keep rates unchanged until 2024. Inflation currently stands at 3.1%, and investors are now searching the horizon for a rate drop in May. Senior economist Preston Caldwell even hinted at delaying expectations for rate cuts from March to May for a more dovish stance.

The Federal Reserve has certainly set the ball rolling for a series of rate hikes in March 2022 to keep inflation and interest rates under the ropes. Many eagerly awaited a rate cut as the next stop, suggesting preparedness for another rate hike.

Possible Interest Rate Hike

To keep tight financial conditions and inflation under wraps, Dallas Federal Reserve President Lorie Logan warned in January about another interest rate hike in 2024. Logan made it clear that to ward off economic instability, improvements should be completed one at a time.

The Federal Reserve tiptoes around potential inflation resurgence. As per January’s meeting minutes, the Fed also plans to keep up the high interest rates until they can effectively hold back recent inflation surges.

Inflation fell off quite a height from its 2022 peak. The Federal Open Market Committee had been considering easing high-interest rates to avoid an economic slowdown, predicting March cuts at first. But, market forecasts changed to June. So, the committee set a cautious approach in stone, driving the point home for data assessment for sustainable inflation decline.

The meeting before the Bureau of Labor Statistics’ January report unveiled higher-than-expected inflation, probably delaying a rate cut. Economists said policymakers remain cautious, prioritizing data analysis over premature rate adjustments.

With a robust economy, low unemployment and solid growth, President Logan said another rate hike may be needed for stability.

January Fed Meeting

The minutes lifted the lid on the Federal Reserve’s strategies to balance inflation control with economic stability. The Fed carried out rate hikes to raise borrowing costs, making waves in mortgages and credit card rates and aligning with a target 2% inflation rate.

Despite slowing inflation and a strong U.S. economy, the Fed considered careful rate cuts in 2024, stressing no rush. Buzz of potential cuts for 2024 caused market excitement, opening up to big mortgage rate drops. HELOC rates also decreased.

Policymakers nailed shifting market expectations, making investors look forward to the Fed cutting rates in May instead of March. However, expectations for a significant rate decrease by December 2024 are farfetched unless a significant economic downturn happens. Inflation remains above the Fed’s target, and consumer spending and growth exceeded projections in late 2023.

How Quick Can the Fed Cut Rates?

The Fed’s approach to rate cuts is different from the other cycles that happened — now with a cautious approach. It’s unlike after the 2008 financial crisis and the 2020 pandemic.

Even though there is low unemployment, growth and resilient consumer sentiment, there is a smaller urgency for rapid rate reductions. Fed Governor Christopher Waller emphasized data-driven policy over hasty hope-based actions. A data-driven policy is an important compass for guiding the Fed’s policy decisions.

The Fed is cautious, not wanting a repeat of its 1970s policy mistakes that led to severe inflation and recession under Chair Paul Volcker. It is prepared to adjust if inflation slows but keeps looking behind its shoulders for raising rates again. That is because resurging inflation could chip away at the Fed’s credibility.

What’s Next?

Though many believe another rate hike is unlikely around the corner, it could still happen. Although rate cuts are something that Americans may expect, when they will happen is never sure. Bakkum highlights the Fed’s dual objective of price stability and full employment and says to exercise caution when reading President Logan’s words.

Allains’s Charlie Ripley and Fed Chairman Jerome Powell showed caution about rate cuts despite expectations of stable rates because of strong economic indicators. Ripley believes another hike has a snowball’s chance in hell despite the flexibility of the Fed.

Since high interest rates are predicted to stay in place, consumers should concentrate on paying off expensive debt. Look for deals for 0% balance transfers and make a plan to pay off credit card debt. If your credit has turned a new leaf, you might want to consider refinancing into fixed-rate loans.

Also, lock in a certificate of deposit (CD) as soon as possible, especially for longer-term CDs. The top-yielding 5-year CD is falling from 4.75% to 4.6%. McBride believes there’s no need to cut rates because of the current economic conditions.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.