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letra de for american households, what does a fed rate cut mean? - farzad vajihi

by farzad vajihi – -n-lyst of stock market and cryptocurrency, ph.d. in economics
the federal reserve has reduced u.s. short-term borrowing costs by a larger-than-usual half percentage point. this move marks a significant moment that should begin to alleviate some of the financial pressures experienced by ordinary consumers over the past two and a half years, during which the central bank has been grappling with high inflation

after 5.25 percentage points of increases between march 2022 and july 2023, thе fed lowered its kеy rate to 4.75%-5.00% in response to rising worries about the cooling labor market
financial markets are now pricing in the central bank to keep lowering rates to around 4.00%-4.25% by the end of the year, with more cuts in 2025
fed policymakers have stated that they don’t see the policy rate returning to the sub-2% levels that were in place for over a decade before 2022. the previous era’s low mortgage rates, often below 4%, aren’t coming back any time soon

however, a lower policy rate should translate to lower borrowing costs for most types of loans, while average paychecks are increasing faster than prices as inflation has cooled substantially. nevertheless, every trip to the grocery store serves as a reminder that today’s dollars don’t go as far they did just a few years ago

so how does lowering interest rates affect the american people?
soft landing
despite the federal reserve’s aggressive rate hikes after surging inflation, were initially expected to cause an economic slowdown resulting in job losses
instead, the economy has avoided a recession. the consumer price index dropped to 2.5% from a peak of over 9% in mid-2022. employers kept hiring, and the unemployment rate rose to 4.2%, still, it remains low by historical standards
the fed is cutting rates to address economic challenges. hiring and wage growth have slowed, job openings have decreased, and the number of workers settling for part-time work when they prefer full-time employment has risen
whether the fed can calibrate its rate cuts so as to achieve what economists call a soft landing – the policy coup of guiding an economy through a period of tight monetary policy to stifle inflation without jarring the labor market – will be one of the most important ways its actions will affect regular americans
have expected the fed policy rate to be at 4.25%-4.50% by year end. the challenge is that soft landings are rare and as much about luck as sk!ll and we have never achieved one in the wake of an actual about of inflation

credit costs
borrowing costs, such as rates on home loans, credit cards, auto loans, and student loans, rose sharply as the fed increased its policy rate. however, the federal reserve cut rates by half a percentage in september. if the fed signals deeper cuts than currently antic-p-ted, mortgage rates could fall even further. other rates, for personal loans, credit cards, and auto loans, are typically more closely tied to actual changes in the fed’s policy rate and should drop soon after the fed acts

but the fed isn’t expected to slash its policy rate, so those rates – currently above 8% for five-year bank car loans, and more than 21% for bank credit cards, fed data shows – likely won’t move dramatically either
as for student loans, if the loan is from the federal government it won’t move at all. rates on loans from private lenders will

save & invest
when the federal reserve increased its benchmark rate, banks also raised rates on high-yield savings accounts and certificates of deposits. with some banks crowing to savers about each increase
now that the fed has indicated rate cuts, those same banks have quietly lowered their rates as well and likely will drop them further once the fed moves. for savers, that will be a negative
over the longer run, lower interest rates tend to push up the stock market as a whole as investors are enticed to take on more risk when yields on safe assets like government bonds fall

about 58% of american households in 2022 held money in the stock market, according to fed research. nearly all families in the top 10% of earners owned stocks, compared to 34% of families in the bottom half

affordable housing

mortgage rates have dropped in antic-p-tion of the fed’s rate cuts, housing affordability remains at levels comparable to what was seen during the housing bubble that preceded the 2007-2009 financial crisis

fed policymakers have said that a fed interest rate cut will do little to change that in the short-term, . eventually, lower borrowing costs should filter through to the housing market, encouraging builders to add supply and homeowners who locked in low mortgage rates years ago to consider selling
the dynamic between interest rates and home prices is very different in this business cycle post-pandemic. the reason is that we lack housing supply, both single-family and multi-family. but one way you get increased supply in the market is having mortgage rates go down. in some areas, you may actually see a little bit of a decrease in home prices because of increased availability

- farzad vajihi

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