While the initial cut could be modest, the Fed is likely to continue lowering rates, aiming for a range between 4% and 4.5% by the end of the year, with more reductions planned for 2025. However, policymakers have indicated that rates will not return to the sub-2% levels seen prior to 2022, meaning the low mortgage rates of the past are unlikely to come back soon.
Despite these cuts, inflation has cooled significantly, and average paychecks are now rising faster than prices. However, the high cost of goods, like groceries, continues to strain household budgets.
The Fed’s aggressive rate hikes were initially expected to trigger a recession, but the economy has so far avoided that outcome. Inflation, measured by the Consumer Price Index, has dropped to 2.5% from a mid-2022 high of over 9%, while unemployment remains low at 4.2%.
The central bank’s goal is to lower rates without disrupting the labor market further, aiming for what economists call a “soft landing.” This would allow the economy to cool without leading to mass job losses, but history shows such outcomes are rare.
Fed Rate Cut Effect on Loans and Credit Cards
The Fed’s rate cuts should lower borrowing costs for consumers, impacting home loans, credit cards, auto loans, and personal loans. Mortgage rates, which have already dropped to an average of 6.2% from nearly 8% last October, could fall further if the Fed signals deeper cuts.Other types of loans, like credit cards and auto loans, are directly tied to changes in the Fed’s policy rate and are expected to decline soon after the Fed acts. However, significant drops are not anticipated as the central bank isn’t likely to slash rates dramatically.
Fed Rate Cut Effect on Savings and Investments
For savers, the rate cuts could be a downside. Banks, which raised interest rates on high-yield savings accounts as the Fed increased its rates, have begun quietly lowering them in anticipation of the cuts. As the Fed officially reduces rates, savers can expect returns on savings accounts and CDs to decline.
In the stock market, lower interest rates generally boost prices over time by making riskier assets more attractive. However, the immediate reaction will depend on whether investors see the rate cut as a sign the economy is stabilizing or if they fear the Fed may be falling behind in controlling inflation.
Fed Rate Cut Effect on Mortgages
Though mortgage rates have dropped, housing affordability remains a challenge, with national levels comparable to those seen during the 2007-2009 financial crisis. Fed officials have stated that rate cuts won’t immediately improve affordability but could encourage more construction and home sales in the long run.
The lack of housing supply, both single-family and multi-family, is the main factor keeping prices high. Over time, lower mortgage rates could ease these pressures, potentially leading to increased housing availability and even a modest decline in home prices in some areas.
With Inputs from Reuters