The Federal Reserve is expected to announce this week that it is dropping its benchmark interest rate from a two-decade peak, which has been anticipated for months by American consumers, home buyers, businesspeople, and political leaders.
Once the Fed has decided that high inflation is almost overcome, it is likely that there will be a series of rate reduction to make borrowing more reasonable.
Take Kelly Mardis of Tempe, Arizona, as an example; she is the owner of Marcel Painting. Real estate agents who are getting houses ready to sell or new homeowners account for around 25% of Mardis’ revenue. As soon as the Federal Reserve began rising interest rates in March 2022 and continued doing so until July 2023, he recollects, customer queries began to decline.
Mardis had to fire nearly half of his 30-person workforce due to the collapse of the housing market. After fourteen years of drought, he had never encountered anything like that.
Mardis expects things to improve after the Federal Reserve starts decreasing rates on Wednesday. Mortgages, automobile loans, credit cards, and business loans often have their interest rates lowered over time as a result of a series of rate decreases by the Federal Reserve.
The speaker, Mardis, expressed her certainty that it would have an impact. “I’m excited about it.”
Meanwhile, the Fed meeting this week is still shrouded in a great deal of mystery.
With the benchmark rate currently at 5.3%, how much further will policymakers opt to cut? Which is more accurate: a conventional quarter-point or an outsized half-point?
Will they continue to ease credit requirements at their November and December meetings, as well as in 2025? Will the reduction in borrowing costs be implemented in a timely manner to support an economy that is still expanding solidly but is evidently showing signs of weakness?
The Federal Reserve is ready to lower interest rates to bolster the employment market and accomplish the infamously challenging “soft landing,” as Chair Jerome Powell stressed in a speech last month in Jackson Hole, Wyoming. When the central bank successfully reduces inflation, the economy avoids a severe recession and a spike in unemployment.
The Federal Reserve’s ability to accomplish this is debatable.
Many interest rates have already dropped in expectation of rate reduction, which is encouraging since Powell and other Fed officials have suggested that they are coming. Freddie Mac, the mortgage industry behemoth, reported that the average 30-year mortgage rate fell to 6.2% last week, the lowest level in over 18 months, from a peak of over 7.8%. Falling rates have been felt across the board, including the yield on the five-year Treasury note, which has an impact on rates for vehicle loans.
Kathy Bostjancic, chief economist at Nationwide Financial, spoke on how this helps reduce borrowing prices generally. “Consumers can actually feel some relief from that.”
Companies have access to cheaper borrowing rates compared to the last year or two, which could lead to an increase in investment expenditure.
“The question is if it’s helping quickly enough… to actually deliver the soft landing that everyone’s been hoping for,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Economists are hoping the Federal Reserve will announce a half-point rate decrease this week. This is due, in part, to the widespread belief that the central bank should have started decreasing rates during their July meeting. Futures prices on Friday showed that Wall Street traders expect the Fed to implement two half-point cuts by the end of the year.
However, Goldberg hinted that a half-point rate drop this week would have some negative consequences. It could give the impression to investors that the Federal Reserve is more concerned about the economy than they actually are.
Goldberg warned that the market could “assume something is wrong” if the Federal Reserve anticipates a “quite terrible” event.
It may also cause people to anticipate further half-point reductions from the Fed, which they may not actually implement.
More consequential than the Federal Reserve’s move on Wednesday will be the rate-cutting pace and end point for next year. A more “neutral” setting for the Fed’s main rate, which might be as low as 3%, would be appropriate if policymakers determine that they no longer need to slow the economy in order to combat inflation. For that, additional rate decreases would be necessary.
Lower rates are needed for the economy, according to many analysts. According to KPMG chief economist Diane Swonk, hiring has been as slow as the employment growth rate in the wake of the Great Recession of 2008–2009, averaging just 116,000 per month during the previous three months. A whole percentage point more people are out of work now, at 4.2%.
When hiring is not happening quickly enough, “there is a fragility out there,” as Swonk put it. “The job market is still considerably weaker than we anticipated.”
However, the economy can get a much-needed lift at the last minute if the Fed lowers interest rates.
Consumers often transfer high-interest debt, such as credit card balances, into lower-cost personal loans when interest rates drop, according to Michele Raneri, head of research in the United States at credit monitoring firm TransUnion. They would feel less financial strain if they did this.
According to Raneri, more homeowners will be ready to sell their homes once mortgage rates drop below 6%. This is because they will no longer be afraid to go from a low to a much higher rate. An increase in home sales would alleviate the shortage of available properties, making it easier for future generations to purchase their first homes.
“That begins to free us from this stalemate where there is a dearth of housing inventory,” Raneri remarked. “To begin that churn, we require the intervention of certain individuals.”
There are indications that the turnover is increasing for other small firms as well. Brittany Hart, owner of a software consulting firm in Phoenix, has noticed an uptick in interest from prospective clients looking to adopt new technologies to enhance productivity. Her firm works with mortgage brokers, wealth managers, and banks. That is because they anticipate a recovery in the home market.
In addition to her current staff of about twenty, Hart has begun recruiting three more people to assist with the anticipated influx of business.
There has been a return to “that normal activity in the housing market,” she added, and this is the first leading indicator.