Lower Interest Rates and Their Impact on Consumers
The Federal Reserve recently reduced short-term borrowing costs in the U.S. by a significant half-percentage point, marking an important moment for American households. This move is intended to alleviate some of the financial pressures that have built up over the past two and a half years, as the central bank has been battling inflation.
Between March 2022 and July 2023, the Fed raised interest rates by 5.25 percentage points. Now, with concerns about a cooling labor market, the Fed has lowered the key rate to 4.75%–5.00%. Financial markets are predicting that the rate will drop even further, to around 4.00%–4.25%, by the end of the year, with additional cuts expected in 2025.
How Will This Affect Everyday Americans?
Easing Economic Pressures
The Fed’s aggressive rate hikes were initially expected to trigger a slowdown in the economy, potentially leading to job losses. However, the U.S. economy has so far avoided a recession, even as inflation has cooled.
The Fed is now aiming for a “soft landing,” meaning it hopes to reduce inflation without causing major disruptions to the labor market. With hiring and wage growth slowing and more workers opting for part-time jobs, the Fed’s rate cuts could help ease these trends by reducing borrowing costs, allowing households and businesses to spend more freely.
Impact on Borrowing Costs
Interest rates for loans like mortgages, credit cards, auto loans, and student loans surged as the Fed raised its rates. Now, as the Fed signals further cuts, some of these rates—especially mortgage rates—have already started to decrease. For example, the average 30-year fixed mortgage rate has dropped from nearly 8% last October to 6.20% recently.
However, student loans from the federal government will not be affected by the rate cuts, although loans from private lenders may see changes.
Savings and Investment Adjustments
As the Fed hiked its benchmark rate, banks followed suit, raising interest rates on high-yield savings accounts and certificates of deposit (CDs). But as rate cuts are anticipated, those same banks are quietly lowering their rates. This is a downside for savers, but lower interest rates tend to boost the stock market, encouraging more risk-taking among investors.
With approximately 58% of American households having investments in the stock market, these trends could encourage increased investment in stocks over safer assets like government bonds.
Housing Affordability
Although mortgage rates have fallen after the Fed’s rate cuts, housing affordability remains challenging. Data from the Atlanta Fed suggests that affordability is at levels similar to the 2007–2009 financial crisis. According to Fed policymakers, interest rate cuts won’t immediately improve housing affordability.
In the long term, lower borrowing costs could encourage builders to increase housing supply, which could eventually help balance the market and lower prices in some areas.
Kathy Bostjancic from Nationwide notes that housing supply is the key factor affecting home prices in this cycle, particularly in a post-pandemic environment. However, with lower mortgage rates, more homeowners and builders could contribute to increased supply, potentially improving affordability over time.