“By reducing interest rates, we can decrease borrowing costs, stimulate business expansion, and increase job hiring.”
Reducing interest rates may help maintain the job market progress made in the past two years. Insights from @Regmi_Ira in @Nasdaq 🔻
— Roosevelt Institute (@rooseveltinst) September 23, 2024
This week, the Federal Reserve announced a major reduction in interest rates, decreasing the benchmark federal funds rate by 50 basis points to a range of 4.75 percent to 5 percent. This unexpected move is largely interpreted as a sign of triumph over inflation and offers some relief to borrowers. The adjustment signifies a noteworthy departure from the previous range of 5.25 percent to 5.5 percent that had been in place since July 2023.
Via The NY Times, Claudia Sahm discusses the Sahm Rule alongside the 50 basis point rate reduction from the Federal Reserve. #economy #markets #federalreserve
— Mohamed A. El-Erian (@elerianm) September 22, 2024
The decision follows a notable decline in inflation, which has been decreasing after peaking at 9.1 percent—its highest level in 40 years—in mid-2022. Current inflation is reported at 2.5 percent, nearing the Fed’s target of 2 percent. Although the rate cut was larger than expected, many households, particularly those with fixed-rate loans, may not experience its benefits right away.
Minneapolis Fed President Neel Kashkari indicated that his SEP rate projection aligned with the median estimate, which predicted an additional 50 basis points decrease through 2024.
— Nick Timiraos (@NickTimiraos) September 23, 2024
Households with variable-rate mortgages or student loans will see a gradual easing of financial pressures due to the lower interest rates, as repayment schedules typically reset every six months to a year. In contrast, prospective homebuyers may benefit more significantly from the rate reduction; as reported by Freddie Mac, the average rate for a 30-year fixed-rate mortgage has dropped to 6.09 percent, down from nearly 8 percent last October.
FED’S BOWMAN: DISSENTING ON HALF-POINT CUT AS INFLATION REMAINS ABOVE TARGET, “MEASURED” CUTTING PACE IS MORE SUITABLE
— *Walter Bloomberg (@DeItaone) September 24, 2024
Effects of the Fed rate cut on borrowers
Nancy Vanden Houten, the lead economist at Oxford Economics, remarked, “The Fed’s approach was more assertive than we anticipated, which may lead to somewhat lower mortgage rates as further reductions are expected later this year.”
Expectations indicate that rates on auto loans and credit cards will also see a decrease. However, with current rates above 8 percent for five-year auto loans and over 21 percent for credit cards, any savings for borrowers are likely to be small. Analysts are split on how the recent rate cut could affect voter perceptions ahead of the presidential election on November 5.
Some theorize that this decision could bolster consumer confidence and potentially mitigate economic downward trends, possibly benefiting the Democratic presidential candidate. Still, polling indicates that voters currently favor the Republican nominee on economic matters. The uncertainty surrounding fiscal and trade policies—especially the possibility of significant tariffs in the event of a second Trump term—might diminish the advantages from the Fed’s interest rate adjustments.
Economist Rachel Ziemba highlighted that overall economic sentiments, including rising food and fuel prices along with increasing health insurance costs, could overshadow the potential advantages of reduced interest rates. In summary, while the Fed’s decision to lower rates is a promising development for borrowers and the housing market, the full effects will materialize gradually. Improvements in mortgage rates and homebuyers’ engagement are expected to unfold slowly, and the market is unlikely to return to the historically low rates of previous years.
We can expect the next few years to exhibit only gradual progress rather than significant transformations.
