The 19-year-old has made 12 appearances across all competitions for Ipswich this season, making his full debut in their EFL Cup fixture against Luton in August.
"I can't wait to get started," Downes told the Hatters' official website. "It's happened totally out of the blue. I was called into the gaffer's office and he literally just said 'Do you want to go out on loan to Luton?' I just said 'Yes, get me there, I just want to be playing football!'
"That is the main reason I've come, because I want to play football. Every youngster wants to be improving, and that's my aim – to come here, improve and help the team."
Downes, capped three times for England at Under-19s level, joins Luton with the club sitting atop the League Two table.