WASHINGTON (AP) — American consumers and home buyers, businesspeople and political leaders have been waiting months for what the Federal Reserve is set to announce this week: lowering its key interest rate of a two-decade peak.
It will likely be the first in a series of rate cuts that should make borrowing more affordable now that the Fed has deemed high inflation all but vanquished.
Consider Kelly Mardis, owner of Marcel Painting in Tempe, Arizona. About a quarter of Mardis’s business comes from real estate agents preparing homes for sale or from new home buyers. Customer inquiries, he recalls, dropped off quickly almost as soon as the Fed began raising interest rates in March 2022 and then continued to raise rates through July 2023.
As the housing market contracted, Mardis had to lay off about half of his 30-person staff. It was the worst dry spell he had seen in 14 years.
After the Fed began cutting rates Wednesday, Tuesday saw brighter days ahead. Typically, a succession of Fed rate cuts leads over time to lower borrowing costs for things like mortgages, auto loans, credit cards and business loans.
“I’m 100 percent sure it would make a difference,” Mardis said. “I’m looking forward to it.”
At the same time, many uncertainties still surround this week’s Fed meeting.
How much will policymakers decide to cut their key interest rate, currently at 5.3%? By a quarter point, as usual, or by an unusually high half point?
Will they continue to ease credit at their next meetings in November and December and in 2025? Will lower borrowing costs take effect in time to support an economy that is recovering? still growing at a steady pace but clearly showing cracks?
Chairman Jerome Powell stressed in a speech last month in Jackson HoleIn Wyoming, the Fed is ready to cut rates to support the jobs market and achieve a “soft landing,” a notoriously difficult process. That is, when the central bank manages to curb inflation without tipping the economy into a sharp recession and causing unemployment to spike.
It is not entirely certain that the Fed can achieve this.
One encouraging sign is that while Powell and other Fed officials have signaled that rate cuts are coming, many interest rates have already fallen in anticipation. The average 30-year mortgage rate fell to 6.2% last week — the lowest level in about 18 months and down from a peak of nearly 7.8%, according to mortgage giant Freddie Mac. Other rates, such as the yield on five-year Treasury notes, which influences auto loan rates, have also fallen.
“It really helps lower borrowing costs overall,” said Kathy Bostjancic, chief economist at Nationwide Financial. “It helps provide significant relief to consumers.”
Businesses can now borrow at lower rates than they could in the past year, which could potentially boost their capital spending.
“The question is whether it helps fast enough…to actually provide the soft landing that everyone is hoping for,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Many economists would like to see the Fed announce a half-point rate cut this week, in part because they believe policymakers should have started cutting rates at their previous meeting in July. Wall Street traders said Friday they expect the Fed to make at least two half-point rate cuts by the end of the year, based on futures prices.
Goldberg, however, suggested that a half-point rate cut this week could have negative consequences. It could signal to markets that Fed officials are more concerned about the economy than they actually are.
“Markets might assume that something is wrong and the Fed sees something pretty terrible on the horizon,” Goldberg said.
It could also raise expectations of additional half-point rate cuts that the Fed may not implement.
In the long run, what matters most is not so much the Fed’s decision on Wednesday as the pace of rate cuts over the next year and beyond. If Fed officials conclude that inflation is all but vanquished and they no longer need to slow the economy, that would mean setting their policy rate at a more “neutral” level, which could be as low as 3%. That would require a series of further rate cuts.
Many economists believe the economy needs much lower interest rates. Diane Swonk, chief economist at KPMG, notes that hiring has averaged 116,000 jobs per month over the past three months, a level matching the weak job growth that followed the Great Recession of 2008-09. The unemployment rate has risen nearly a full percentage point to 4.2%.
“There’s some fragility when the pace of hiring isn’t very strong,” Swonk said. “The labor market is still much weaker than we thought.”
Yet the Fed’s rate cuts could provide a crucial boost to the economy just when it needs it.
Michele Raneri, head of U.S. research at TransUnion, a credit monitoring firm, noted that low rates typically prompt consumers to refinance their high-interest debt (mainly credit card debt) into lower-cost personal loans. That would ease their financial burden.
And once mortgage rates fall below 6%, Raneri said, more homeowners will likely be willing to sell, rather than hold on to their homes out of reluctance to trade a low mortgage rate for a much higher one. More home sales would help ease the supply crunch that makes it difficult for young people to buy their first home.
“It starts to break the logjam that we’re in, where there’s little housing in stock,” Raneri said. “We need to get some people moving to start that rotation.”
Other small businesses are seeing signs of a revival in turnover. Brittany Hart, owner of a software consulting firm in Phoenix that works with mortgage brokers, wealth managers and banks, sees growing interest from potential clients in adopting new software to improve their efficiency. That’s because they expect the real estate market to rebound.
Hart has begun looking for three new employees to help manage the planned operations, in addition to the approximately 20 employees she currently has.
“This is the first leading indicator that we are returning to normal activity in the real estate market,” she said.
