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The Federal Reserve is preparing to announce interest rate cuts as soon as Wednesday. The board is set to meet on Sept. 17 through 18. The move by the Fed could bring some signs of economic relief to people with mortgages, credit cards, and vehicle loans.
As the market continues its upward trend (despite last Friday’s weak job data but slowing unemployment rate), financial experts expressed confidence that the Fed will cut interest rates by at least 25 basis points this month.
The current Federal Reserve interest rate is at 5.25% to 5.50%, which has remained unchanged since the Federal Open Market Committee set the rate — a 23-year-high — in July 2023.
A cut could be a boon for markets
Last month, Fed Chair Jerome Powell signaled that the “time has come” for an interest rate cut, as key data continues to show that inflation is cooling. Lower interest rates could be a boon for markets, which have been waiting for upbeat signals about the U.S. economy.
In an interview with Quartz, Kristina Hooper, Invesco’s (IVZ) chief global market strategist, said the market’s reaction to the Fed’s rate decision could be positive.
“I think the general environment will be positive and I think we’ll see an environment that is supportive of risk assets for months to come because there is an anticipation that this is not a one-and-done, that we have a number of rate cuts ahead of us.”
What does the cut mean for mortgages?
Overall, data shows that the housing market is recovering slowly, but home prices remain high. According to recent data from the Mortgage Bankers Association, mortgage rates fell for the sixth straight week as of the week ending on Sept. 6, hitting their lowest level since February 2023.
The fixed mortgage rate fell from 6.43% to 6.29%, which was mainly due to a cooling in both inflation and the job market.
House prices increased by 5.2% over the last year and by 0.5% in August. Housing costs accounted for over 70% of last year’s increase in inflation for all items excluding food and energy, according to Bureau of Labor Statistics data.
A slash in interest rates would most likely decrease mortgage rates further. That could result in more activity in the housing sector, as the lock-in effect continues to soften. Despite that, a surge in demand for products and services could potentially send home prices even higher if the supply doesn’t match the demand.
Americans want to do more when interest rates are cut
With lower interest rates, consumers could make large purchases that they’ve been putting off for more than a year because of this high-rate environment.
According to data from Nerdwallet (NRDS), 61% of Americans plan to make major purchases on cars, take out loans on credit cards, and buy homes.
What the Fed decision could mean for credit card applications and holders
Increasing credit card rates along with inflation have both strongly contributed to the harsh economic conditions households have dealt with over the past couple of years.
Currently, the average credit card interest rate is 20.78% up from 16% in 2022, according to recent data from Bankrate. Meanwhile, the current interest rate for private labeled credit cards is higher at 30.45%. A possible interest rate cut could eventually lower the monthly interest charge that’s added to a person’s existing credit card balance.
The highly anticipated decrease in interest rates might lead to lower monthly payments for consumers and make refinancing higher-interest debt into cheaper credit options, like personal or home equity loans, more appealing, said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion (TRU).
“This forthcoming reduction in interest rates could ultimately allow for consumers to see lower monthly payments,” Raneri said. “It also may allow many consumers to consider refinancing higher-interest debt into a lower-interest credit product such as a personal loan or home equity loan. In recent months, lenders have begun exercising more discretion regarding whom they are extending credit, preferring less risky borrowers.”
What are the effects of the interest rate cut on the labor market?
The current higher-for-longer rate environment has shown how high interest rates, which are designed to cool the economy, can hit the labor market. Lower rates will help ease some of the pressure we’ve begun to see on the labor market in recent weeks.
In August, the unemployment rate fell to 4.2%, while 7.1 million individuals remained unemployed, according to recent data from the Bureau of Labor Statistics.
Many analysts see the possibility of a “shallow recession” at the end of this year and into next year – which means the unemployment rate could be slightly higher, and annual GDP growth could slow as inflation continues to cool.
“The current level of our policy rate gives us ample room to respond to any risks we may face,’ said Chicago Fed President Austan Goolsbee. “Including the risk of unwelcome further weakening in labor market conditions.”
What does the Fed’s decision mean for the banking sector?
Banks have been preparing for and pricing for the Fed’s rate cut for some time now and have been warning that their net interest income will start to return to normal levels. While NII — a key way banks make money — gave big banks a major boost last year, many are expecting a slowdown.
While inflation continues to close in on consumers, regional banks are preparing to face more risks from their lending practices. Some of the large banks, including Citigroup (C), JP Morgan (JPM), and Wells Fargo (WFC) have been anticipating a slowdown in economic buildup.
According to Mark Narron, a senior director in Fitch Ratings’ Financial Institutions Group, this effect of rate cuts on banks could make them vulnerable to “more delinquencies and defaults” as the year comes to an end. The delinquencies are linked to more consumers running out of their pandemic-era savings and finding themselves leaning more toward their credit lines.
