Federal Reserve cuts rates by 0.5%

"By lowering interest rates, we could lower borrowing costs, encourage businesses to expand and hire more workers."

Lowering interest rates can preserve the labor market gains achieved over the past two years. @Regmi_Ira's insights in @Nasdaq 🔻 https://t.co/oPJsA9dARR

— Roosevelt Institute (@rooseveltinst) September 23, 2024

The Federal Reserve delivered a significant interest rate cut this week, lowering the benchmark federal funds rate by half a percentage point to the 4.75 percent to 5 percent range. This move, which came as a surprise to some economists, is widely seen as a declaration of victory over inflation and a signal of relief for borrowers. The rate cut marks a substantial shift from the 5.25 percent to 5.5 percent range, where the federal funds rate had been set since July 2023.

Via The NY Times, Claudia Sahm on the Sahm Rule and the Federal Reserve’s 50 basis point rate cut.#economy #markets #federalreserve @nytimes pic.twitter.com/4NmSPyoijQ

— Mohamed A. El-Erian (@elerianm) September 22, 2024

The decision was made in light of the progress made on inflation, which has consistently trended downward since hitting a 40-year high of 9.1 percent in mid-2022. Inflation now stands at 2.5 percent, close to the Fed’s target of 2 percent. Despite the larger-than-anticipated rate cut, its immediate benefits may not be felt by many households, particularly those with fixed-rate loans.

Minneapolis Fed President Neel Kashkari says his SEP rate projection aligned with the median submission that had 50 bps lower last week and another 50 bps more thru 2024 https://t.co/aFoJyjfDkr

— Nick Timiraos (@NickTimiraos) September 23, 2024

For households holding variable-rate mortgages or student loans, the relief from lower interest rates will be gradual, as repayment terms typically reset only once every six months or a year. Prospective homebuyers, however, stand to gain the most from the rate cut. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage has decreased to 6.09 percent from nearly 8 percent last October.

FED’S BOWMAN: DISSENT TO HALF-POINT CUT WARRANTED BY INFLATION STILL ABOVE TARGET, “MEASURED” PACE OF CUTS MORE APPROPRIATE

— *Walter Bloomberg (@DeItaone) September 24, 2024

Fed rate cut impacts borrowers

Nancy Vanden Houten, lead economist at Oxford Economics, noted, “The Fed was more aggressive than we expected, and that might translate into mortgage rates coming down a bit more as more cuts are due later in the year.” Interest rates on auto loans and credit cards are also expected to decrease, but since these rates are currently elevated—above 8 percent for five-year car loans and over 21 percent for credit cards—any savings for borrowers are likely to be modest. Analysts are divided on how the rate cut might influence voter sentiment ahead of the November 5 presidential election. Some suggest that the cut could reinforce consumer confidence and guard against economic weakening, potentially benefiting the Democratic presidential nominee. However, polls still show voters give the Republican presidential nominee an edge on economic issues. The uncertainty over fiscal and trade policy outcomes, especially with the potential for sweeping tariffs under a second Trump presidency, could undermine the benefits of the Fed’s interest rate decisions. Economist Rachel Ziemba emphasized that broader economic perceptions, such as food and fuel prices and rising health insurance costs, could overshadow the benefits from lower interest rates. In conclusion, while the Fed’s rate cut is a positive sign for borrowers and the housing market, the effects will unfold gradually. Mortgage rates and homebuyer activity are expected to slowly improve, yet the market won’t return to the exceptionally low rates of recent years. The next few years will likely see incremental changes rather than dramatic shifts.