Rate Cuts Loom Prior to September Fed Meeting; Read Our Interview With Bobbi Rebell
As the U.S. economy shows some signs of improvement post-COVID, many Americans are wondering how potential rate cuts by the Federal Reserve (Fed) might impact their daily lives.
Chair Jerome Powell and the Fed have held off on cutting rates in each meeting through 2024 due to ongoing concerns about the economy and job market, although the likelihood of incoming lower interest rates are now expected to come into effect at the conclusion of the Fed’s next meeting on September 17 and 18 with recent positive indicators, including the addition of 142,000 jobs in August — according to the U.S. Department of Labor.
Additionally, The federal funds rate is maintained at the 5.25% to 5.50% range, and expectations are that the Fed will reduce the rate by 25 basis points.
For context, this rate cut would be the first since March 2020, and initially, amidst the COVID pandemic, inflation was scorching the nation, so the Fed looked to cool the economy by increasing rates to recent record highs.
The Guardian noted, “Now that price growth is falling back — it rose at an annual rate of 2.9% in July, having faded from a peak of 9.1% in June 2022 — they are preparing to cut rates, but have yet to do so.”
“The latest report from the Bureau of Labor Statistics shows that the U.S. economy added 142,000 jobs in August, with the unemployment rate edging down to 4.2 percent. Earnings continue to rise, reflecting ongoing wage growth, and labor force participation remains strong, including an all-time historic high women’s prime age labor force participation rate,” said Acting Secretary of Labor Julie Su in a statement.
“What we’re seeing is a healthy, balanced economy that continues to deliver,” she continued. “Not only is the economy adding jobs, but we’re seeing more quality jobs — jobs that provide workers with stability and security. These jobs are more than a paycheck; they mean a safe workplace, the chance to build a future, and the ability to have a voice on the job, including the right to join a union.”
Powell has explained that “the time has come” to take action, though “the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” However, the central bank’s initiative remains relatively clear.
So, in a digestible format, what will rate cuts mean for the average American? Bobbi Rebell, CFP® and personal finance expert with CardRates.com spoke with DCReport to give insight.
What Are the Likely Effects of a Fed Rate Cut on the Overall Economy, Generally, and Also in Terms of Consumer Spending and Borrowing?
When the Fed cuts rates, they are effectively increasing liquidity in the economy because the money banks lend to each other overnight costs the banks less to borrow. What that means is that more money can flow into the economy. Money is, in effect, “cheaper.” There’s more money in circulation. As a practical matter, it means many things that we borrow money for will be more affordable. For example, many people borrow money to buy a home or finance a car. Those loans will likely carry lower interest rates. Keep in mind that there is no automatic direct correlation, but that is what tends to happen.
This affects consumer spending and borrowing because when money is cheaper, both get easier. That is a reason that when there are concerns about an economic slowdown, the Fed considers lowering the interest rates it directly controls in order to boost the economy.
How Could a Rate Cut Impact Inflation, and What Does That Mean for Everyday Consumers?
A rate cut makes money less expensive to borrow and therefore increases consumer’s spending power. It boosts economic activity which is why the Fed will cut rates when the economy is considered weak. When the Fed cuts rates, there is simply more money around for consumers to spend. Presumably, the amount of goods to buy stays the same. More demand for the same supply can push prices up (aka inflation).
The upside is that cheaper borrowing can make things more affordable. For example, housing can become more affordable because mortgage rates are lower. The same goes for other borrowing including car loans and credit card balances.
How Might a Rate Cut Influence Interest Rates on Savings Accounts, Mortgages and Loans?
Rates on savings accounts are set by the financial institutions, not the Fed. That said, financial institutions do tend to move in sync with the Fed Funds rate and for that reason if the Fed lowers rates, consumers will see lower returns on their savings accounts. Mortgages and other loans, while also not directly controlled by the Fed, tend to move lower when the Fed cuts rates. In fact, rates on mortgages and loans sometimes move down in anticipation of a Fed rate cut because it is a competitive lending market.
What Should Individuals Consider Doing With Their Investments and Savings if the Fed Decides To Cut Rates?
To a large degree their investment strategy should stay on course. That said, if they have money that they intend to invest in CD’s, given that the rates will likely go down, they might consider locking in today’s rates. Keep in mind that CD’s are issued by financial institutions and that the rates can vary widely so it makes sense to shop around.
Are There Potential Short-Term and Long-Term Consequences of a Rate Cut for Both Savers and Borrowers?
In the short-term, savers are going to get a lower return on their money including savings accounts, money market accounts, CD’s etc. In the long run, those lower returns can result in losing significant purchasing power if inflation is higher than the returns they are getting. That means their money will be worth less and less- even if the dollar amount stays the same or goes up a little. Savers who count on the current higher interest rates might consider locking in rates using CD’s to give them a more reliable income stream for at least some time.
In the short-term, borrowers will get quick wins on loans that are not fixed because they will adjust quickly. For example, if they have credit card debt, their rate could drop very soon. Borrowers with adjustable-rate mortgages could also see lower costs in the short term. Anyone looking to get a new loan will have better, lower cost options as well if they are looking to borrow money for not only mortgages, but also things like auto loans and personal loans. That said, if borrowers lock in rates and rates continue to fall, there are often costs to refinance to the lower rate that should be taken into account. Longer term there could be significant savings from the lower payments giving borrowers more flexibility to accomplish their financial goals.
