The Federal Reserve cut interest rates by a higher-than-expected half point at its September meeting, marking the first rate cut in over four years. The Fed’s range now sits between 4.75 and 5 percent, which is the lowest we’ve seen since the spring of 2023.
Rate cuts can impact everything from stocks and housing to employment and inflation – so what does this decision mean for the economy right now?
Why did the Federal Reserve finally cut rates?
Experts have been anticipating a rate cut for months now, but the Fed had to see proof that key indicators were moving in the right direction before they eased up on interest rates. If they pulled back too fast, the Fed risked driving the inflation rate back up. But holding out too long can also lead to trouble for the economy, as hiring, purchasing and borrowing all continue to slow down.
According to Fed Chair Jerome H. Powell, the Fed made the decision to cut rates now because the economy is strong, inflation is coming down and the labor market is healthy. Unemployment did creep up to 4.2 percent in August – still historically low, but higher than we’ve seen over the past couple years. That can be another indicator that it’s a good time to bring rates back down because, as Powell said, they want to keep the job market strong.
How will this Federal Reserve rate cut impact the economy?
At this point, the impact that this rate cut will have on the economy is pure speculation. What we do have, however, are historic trends that might lend some insight into how consumers and investors will handle this change.
Housing Market: According to Freddie Mac, the 30-year fixed rate mortgage is at 6.09 percent, down from a peak of about 7.8 percent last October. These rates began falling in anticipation of rate cuts, and might continue to fall if the Fed signals additional cuts.
Affordability is still down, attributed mostly to the lack of supply. Homeowners who locked in on a lower rate years are opting not to move, which means there are less homes on the market. That lack of supply drives up prices even further.
That being said, as rates drop, more homeowners might begin to list their homes, and prices should gradually come down. You can read more about the housing market in our 2024 update.
Consumer rates: Other consumer loans – like personal loans, credit cards and auto loans – aren’t completely reliant on the Federal Reserve funds rate. There are other factors at play, like a borrower’s credit history and credit score. Experts anticipate that these rates will remain on the high side for a while, as we’re still dealing with a lot of economic uncertainty.
Student loans: Federal government loans will not see a change in interest rates; the rate is set at the time of disbursement. Private lender loans with variable interest rates will see a change, although exact amounts will vary by lender.
The Stock Market: Markets reacted positively to the rate cut, with the Dow Jones and S&P 500 closing out the week on a high note.
Historically, lower rates tend to buoy the markets because investors feel more comfortable taking on a bit more risk. For shorter term investments like savings accounts and money market funds, they correlate with the fed funds rate.
But the markets are unpredictable, and the Fed will be watching closely to see how they respond in the coming weeks and months leading up to more cuts.
Did the Fed pull off a “soft landing”?
A “soft landing” scenario is where the Federal Reserve curbs inflation without a steep drop in economic activity.
At the September meeting, the Fed’s tone was optimistic, indicating that we may have escaped a recession. But there is still a chance for inflation to creep back up after cutting rates, which could negatively impact investors’ optimistic view.
These next few months will be very illuminating about the true state of the economy. But for now, indicators are strong, and the Fed is optimistic that more rate cuts will be coming soon.
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