What the Fed’s rate cut means for consumers, businesses and investors

The Federal Reserve is poised to cut interest rates Wednesday for the first time since the pandemic’s early days, turning the page on an era of dangerously high inflation and marking a major shift at the central bank that could bring relief for households and businesses alike.

The Fed’s benchmark interest rate has sat between 5.25 and 5.5 percent for more than a year, and a cut would make it easier to finance a mortgage or borrow to grow a business. Officials have signaled that they’re ready to lower rates, but they haven’t sent clear messages about how much they’ll move this week. A more aggressive cut would send alarms that the job market is buckling under the Fed’s long push to control price increases by slowing the economy down.

One choice is a more typical quarter-point cut that would be likely to tee up a slower, measured series of reductions. Or officials could dole out a more substantial half-point, showing a proactive eagerness to take pressure off the economy — and fast. Markets are increasingly betting on a larger cut.

Officials at the central bank have shifted their attention from high inflation to a slowing job market, mindful that they have fallen behind the curve before. In 2021, Fed leaders thought rising inflation would be a temporary blip of the covid economy — only to be proved wrong, which led them to rush to hoist interest rates at the fastest pace in decades. Now, the fear is that people could quickly lose their jobs and the unemployment rate could climb further if the Fed delays much more.

“We do not seek or welcome further cooling in labor market conditions,” Powell said in his most important speech of the year at the Jackson Hole Economic Symposium last month.

This week’s decision comes at an especially consequential time ahead of the presidential election. The Fed closely guards its independence from politics, and officials go to great lengths to stick to their mandate of stable prices and full employment. But a rate cut of any size would give some juice to the economy as Vice President Kamala Harris and former president Donald Trump are pitching their economic visions to voters. The Fed is also widely expected to cut rates again at its next meeting, in November — the week of the election.

The Fed’s deliberate, at-times sluggish approach has had economists expecting a quarter-point cut. But in the past few days, financial markets have leaned more toward a half-point move, especially after August inflation data showed continued progress toward the Fed’s 2 percent target. (According to the Fed’s preferred inflation gauge, prices were up 2.5 percent in July.)

Momentum on inflation meant that for much of the year, officials have talked about a balance of risks: If they cut rates too soon, they run the risk of inflation creeping back up. Or if they wait for total assurance that inflation is cruising to normal levels, they could unnecessarily hurt the job market.

A recent string of data made those hypothetical scenarios more real. July jobs numbers came in way below expectations, and while August’s figures were more in line with expectations, the unemployment rate remains above 4 percent. Big revisions to government data also showed hiring was much slower than previously understood in 2023 and early 2024. That all has prompted Fed officials to change their tune.

“In light of the considerable and ongoing progress toward the [Fed’s] 2 percent inflation goal, I believe that the balance of risks has shifted toward the employment side of our dual mandate, and that monetary policy needs to adjust accordingly,” Fed governor Christopher Waller said in a speech earlier this month.

Even though the Fed ultimately is deciding between two options, it’s rare for officials to go into a meeting unsure of what they’re going to do. Some market analysts speculate that simply because a half-point move is still on the table, that suggests officials will come out strong. But it remains to be seen if that reading of the tea leaves holds up.

Some in Washington are calling for the Fed to go even further. On Monday, three Democratic senators — Elizabeth Warren (Mass.), Sheldon Whitehouse (R.I.) and John Hickenlooper (Colo.) — called for a three-quarter-point cut, arguing Powell’s “delays have threatened the economy and left the Fed behind the curve.” While Warren and others started urging for cuts long before Fed officials were ready, such a big move is incredibly rare outside emergency situations.

“This will improve the material well-being of all Americans,” said Joe Brusuelas, chief economist at RSM US. “We had three years of extremely aggressive policy out of the Fed. We’re now pivoting toward the normalization of rates in the post-pandemic economy.”

Michael Madowitz, principal economist at the Roosevelt Institute, said the rate cut will be “great news for the middle class.”

“Not only does it underscore the Fed is convinced that inflation is coming under control, it signals the economy has recovered to a faster, sustainable growth trajectory and is ready for further investments in job creation,” Madowitz said Tuesday in comments emailed to The Washington Post. “Lower rates should bring billions more in long-term investments off the sidelines, and create thousands more long-term jobs.”

Here are some key ways the Fed’s cuts will trickle down to businesses and consumers.

Mortgage rates and the housing market

Lower rates are expected to bring some relief to housing markets, which have undergone a period of price distortion that is pushing more people toward renting. But the impacts won’t be evident right away, said Steve Rick, chief economist at TruStage.

In the wake of the pandemic’s intense disruption to housing markets nationwide, the financial strain of renting a home or obtaining a mortgage has weighed heavily on U.S. households. A mismatch between high demand and low supply has led to volatile times for renters and homeowners.

A rate cut could bring some reprieve for mortgage borrowers, but there may be a delay, in part because many lenders have already priced in a Fed cut in the near term. Further cuts are likely to take place at Fed meetings in November and December, experts said.

“While not immediate, we do expect these rate cuts to eventually lower mortgage rates,” Rick said Tuesday in comments emailed to The Post. “This should increase housing supply in the coming months and years.”

Falling mortgage rates may help more people purchase a house — if they can find one to buy, Brusuelas said. Although more homes eventually could be built as rates go down, some areas may see rising prices in the short term if more people compete for the same pool of houses, he said.

Constance Hunter, chief economist at the Economist Intelligence Unit, disagreed with Brusuelas’s prediction. Many homeowners have been reluctant to sell their houses at a time of relatively high interest rates, since they worried they couldn’t afford a new mortgage to purchase their next home. Now some of those owners will become sellers, Hunter said.

“There’s a very strong possibility that it could actually bring more supply to the market,” she said. “It’s going to solve two problems at once. People are more likely to provide supply, and for those purchasing, [lower interest rates make] the financing cost be more friendly to buyers.”

Credit cards and car loans

People paying off high-interest credit card debt aren’t likely to benefit as much as those seeking to avoid high mortgage rates from the Fed’s rate cut. Credit card interest rates already tend to be well above other interest rates, and companies don’t reduce them as often.

“It’s not going to help very much for the people carrying credit card debts,” said Jeffrey Bergstrand, a professor at the University of Notre Dame and former economist at the Federal Reserve Bank of Boston.

Other than mortgages, Bergstrand said, the consumer product most responsive to the Fed cut will be car loans. Lower interest rates can make them more affordable, and cars are more readily available now, so prices aren’t likely to go up much. Car dealerships should expect an increase in customers.

Interest rates for savings

Historically high interest rates have benefited people with money saved in certain bank accounts and investment vehicles. (Some people in recent years were surprised to learn that they had to pay taxes on the interest they earn in their bank accounts, having never accumulated much interest in their lives before.)

Hunter noted that the amount of money invested in money-market accounts has risen as Americans have noticed the favorable interest rates. As rates fall, some people will take money out of those accounts and invest it elsewhere. “That’s money that’s likely to go get deployed in the stock market,” she said, especially since investors may expect the rate cut to simultaneously reduce their interest on savings and benefit stock performance.

In the broadest terms, Brusuelas said, lower borrowing costs will benefit millennials who are at a time in their financial lives when they are looking to buy homes, while lower interest on savings will hurt retirees who are more focused on maximizing the value of their accounts. But he noted that many retirees bought certificates of deposit in recent years that will continue to earn high rates, since the rates are locked in at the time of purchase.

Lower rates, Bergstrand said, will mostly affect “the more wealthy,” who could afford to put large amounts of money into savings accounts to begin with.

The stock market

Because some investors believe the Fed has been “late to the party” given that other countries’ central banks already slashed rates in recent months, the expected rate cut isn’t likely to translate to major market movements — instead, more depends on further cuts, said Robert Barone, a wealth adviser and managing director at Farther. On Wednesday, Fed officials will also release a fresh set of economic projections that will offer hints as to where they expect rates are headed.

“This is the beginning of a long series of lowerings,” Barone said.

As of Tuesday, investors didn’t seem impressed by the prospect of a cut: The Dow Jones Industrial Average dipped marginally, while the S&P 500 and the tech-heavy Nasdaq eked out meager gains.

It’s difficult to know how markets will respond, noted analysts at SentimenTrader, because the imminent cut in the central bank’s rate has broadly been “a crapshoot for investors.”

“There was no consistent pattern in forward returns after significant hiking cycles,” analysts said in comments emailed Tuesday to The Post. “The last few have been major warning signs, while most of the others were not at all. They were more consistently negative for the dollar (for a while), tech stocks (ironically enough), while being good for Treasury notes and bonds, value stocks, and defensive sectors.”

Inflation

The primary purpose of interest rate hikes was to curb inflation. But economists mostly don’t expect prices to soar again as rates fall.

“We’re possibly going to see even some deflation in some months going forward over the next year,” Barone said. “Worrying about inflation is probably the thing of the past.”

Prices aren’t expected to go back to pre-pandemic levels. But the rate of growth will be more in line with norms of the past few decades, experts said.

Prices might keep rising on certain goods that are affected by forces other than monetary policy. Hunter brought up climate change, for instance: Consumers will keep seeing sharp increases in the cost of homeowner’s insurance because of the cost of climate-fueled disasters, and rising prices on processed foods and drinks because of climate change’s harsh impact on sugar crops.

Hiring

A cooling labor market was one of the chief motivators for the Federal Reserve’s rate cut. In August, during his most important speech of the year, Fed Chair Jerome H. Powell said officials did not “seek or welcome further cooling in labor market conditions.”

The labor market is the engine of the U.S. economy, and economic indicators have hinted that the engine might be sputtering: The national unemployment rate has been ticking upward in recent months, and now sits at 4.2 percent after the most recent jobs report from the Bureau of Labor Statistics.

“The Fed does not want any further softening of the labor market,” said Emily Roland and Matt Miskin, co-chief investment strategists at John Hancock Investment Management, in analysis earlier this week. During an economic downturn, unemployment rates typically hit 5.1 percent, they noted.

If rate cuts get more money flowing through the economy, that can translate to expansion for businesses, including through investments and hiring.

It’s been a confusing time for the labor market. The labor market is extraordinarily strong when judged by any historical benchmark, economists Elise Gould and Josh Bivens of the Economic Policy Institute wrote in a blog post last week. Yet recent signs of softening have raised concerns that the Fed is moving too slowly to lower rates.

“There is no reason why the Fed should be looking to generate a weaker labor market, but recent months have seen signs of a slight softening at the labor markets on the margin,” the two economists wrote. “Continued contractionary monetary policy will exacerbate this labor market weakening, even as the last two years have shown that such weakening is clearly not needed to get the last bit of excess inflation wrung out of the system.”