After a long period of waiting, the moment has finally come. With hopes of a soft landing, Jerome Powell and his team have continuously monitored the state of the economy closely and have now cut rates by half a percentage point. Now that this has happened, everyone has their eyes on the future and what will come from an aggressive start to rate cuts some believe.
Many questions surround the market, U.S. Treasuries, and overall economic uncertainty going forward. Historically, the start of a rate-cutting period will be fogged with uncertainty for companies and the everyday investor. The primary goal of a soft landing will all depend on inflation staying on track as well as monitoring job reports. One main concern outside of inflation is the recent weaker-than-expected job reports, which has worried some economists. Powell signaled in August that this is something the Fed has eyes on, however, the 50 basis point cut over the 25 basis point could signal worry from the Fed surrounding the rising joblessness.
Looking at the markets, as stated earlier there will be fog and uncertainty for some time until more data comes out. Historically, the S&P 500 has performed well in rate-cutting cycles. In addition, small companies with floating debt rates will benefit directly. Outside of stocks, 10-year US Treasury rates have climbed in past rate cuts. Bond spreads have shrunk historically, which remains constant with the other trends.
Depiction of multiple growing debt balances
from the Federal Reserve Bank of New York
For everyday consumers, it will take time for these cuts to fully trickle down. With the presidential election approaching and economic health persisting as a large concern for many, the individual impact of this rate cut and future cuts is significant. Some areas individuals have their attention turned towards are auto loans, saving accounts and CDs, mortgages, and credit cards.
Auto:
Both auto rates and vehicle prices remain high, and affordability has been tough for many. Multiple factors—both personal and economic—go into auto rates. These rates tend to follow a 5-year treasury note and also factor in delinquency, which has been increasing on recent loans. However, once delinquencies drop and rates continue to fall, auto loan rates should come down.
Savings:
Rate cuts are the least exciting for savers. Standard savings accounts, high-yield accounts, money-market funds, and CDs will all eventually inch to lower rates. The pace to which financial service companies lower rates depends on strategic decisions regarding customer attraction and the type of account. One great option right now is locking in a CD before these rates start to lower more; that way, you keep a high rate for some time.
Mortgages:
As of writing this, mortgage rates have fallen to their lowest since February 2023. Affordability has become a massive concern for consumers; unfortunately, rate cuts will not completely solve this issue. Demand and supply are currently out of balance, which is part of the hefty premiums on current home prices. One important factor to consider is a fixed 30-year mortgage generally tracks a 10-year Treasury bond yield, which is affected by investors, the Fed, and inflation expectations. Loans such as adjustable-rate mortgages and HELOCs have variable rates and will be adjusted and impacted sooner than the 30-year fixed rate.
Credit Cards:
Credit cards have recently become a go-to loan product for consumers due to increased accessibility compared to other kinds of debt. Credit card balances have grown 11% as of the second quarter, compared to a just 4% increase in total household debt. Although credit cards give us the ability to spend more freely, they can be an extreme threat to one’s finances. The higher interest rates make credit cards one of the more expensive forms of debt, which makes September’s rate cut exciting for high credit card spenders. The Fed’s rate cut is definitely a boon to those consumers with credit card debt.
Concluding Thoughts:
Now that the Fed has cut rates, all eyes are on the future and what it holds. Questions surrounding a highly anticipated soft-landing remain unanswered, and will not be answered for some time. Outside of the U.S., the world economy is set to slowly pickup as rates fall and wages recover. The OECD expects global output to increase by 3.2% in 2024, which is up significantly from the 2.7% increase predicted at the end of 2023. Despite positive outlooks, many consumers are still wary, which is to be expected. Moving forward, all eyes will be on the Fed’s next steps, job and inflation reports, as well as the 2024 election and each candidate's economic outlook.
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