Even before the Federal Reserve approved its big half-percentage point interest rate cut last week, financial markets had begun making credit cheaper for households and businesses by lowering mortgage rates, cutting corporate bond yields and reducing what consumers pay for personal, auto and other loans.
It is unclear how quickly this process will continue now that the US central bank has begun the easing cycle, particularly whether the easing of credit conditions will become tangible to consumers in ways that will change attitudes about the economy ahead of the November 5 presidential election.
Several recent surveys suggest that while the pace of price increases has slowed sharply, public confidence remains marked by nearly two years of high inflation, even though falling rates indicate that a chapter in recent economic history is coming to a close and borrowing money is becoming cheaper.
“My daughter has been trying to buy a house for years and she can’t,” said Julie Miller, who works at her son’s electric company in Reno, Nevada, a state where housing prices have risen rapidly during the COVID-19 pandemic. Nevada, one of seven key swing states in the presidential race, is being aggressively contested by Vice President Kamala Harris, who replaced President Joe Biden as the Democratic nominee, and former President Donald Trump, the Republican challenger.
Housing costs are wearing on Miller’s daughter, and higher Taco Bell prices have caused Miller to cut back on the usual Friday night excursions to the fast-food joint with her granddaughter. She’s now leaning toward voting for Trump. “I don’t think Biden has done a great job on inflation,” she says.
Harris supporters had similar concerns about high prices, even as they defended her as the best candidate to address the problem.
Borrowing costs fall
The Federal Reserve’s Sept. 18 rate cut is likely to be followed by others, with at least another quarter-point reduction expected when policymakers begin their next two-day policy meeting, a day after the U.S. election.
Just as rate hikes translate into higher borrowing costs for households and businesses, discouraging them from borrowing, spending and investing to cool inflation, lower borrowing costs change the calculus for prospective home buyers and businesses, particularly small businesses looking to finance new equipment or expand production.
The Federal Reserve’s long-announced easing of monetary policy has already put money back into people’s pockets. For example, the average rate on a 30-year fixed-rate mortgage, the most popular mortgage, is approaching 6%, after having been close to 8% just a year ago.
Redfin, a real estate company, recently estimated that the median payment for homes sold or listed for sale in the four weeks through Sept. 15 was $300 less than the all-time high hit in April and nearly 3% less than a year ago.
But with that adjustment in place, “mortgage rates are likely to remain relatively stable over the next two weeks,” Redfin economist Chen Zhao wrote in a post on the company’s website.
In fact, according to Federal Reserve estimates, mortgage rates are likely to stabilize around 5%, meaning most of the relief has already occurred.
Banks have begun cutting the “prime rate” they charge their most creditworthy borrowers to align with the Federal Reserve’s rate cuts. Other forms of consumer credit — personal and auto loans, where households might get better terms — have changed only marginally so far, and banks may be slower to give up charging higher funding costs.
Investors and economists viewed last week’s rate cut as less important than the message it sent from a central bank willing to ease lending and confident that recent high inflation will not be repeated.
In fact, inflation has seen one of its fastest declines ever: the annual increase in the consumer price index fell from more than 9% in June 2022 to 2.6% year-over-year last month. The Fed’s preferred personal consumption expenditures price index rose at a 2.5% pace in July, close to the central bank’s 2% target.
Pessimism
The US economy has performed reasonably well despite concerns that the job market may be about to weaken.
New claims for unemployment benefits remain low and unexpectedly fell in the past week, while the jobless rate, at 4.2% in August, is up from a year ago but remains around the level the Federal Reserve considers sustainable without putting excessive pressure on wages and prices. The Philadelphia Fed manufacturing index rose recently and August retail sales rose despite expectations of a decline.
But none of this has brought about a decisive change in public opinion.
The percentage of Americans who believe the economy is headed in the right direction rose to 25% in August from 17% in May 2022, according to the Reuters/Ipsos poll. However, the percentage who believe the economy is headed in the wrong direction has fallen to 60% from 74% in the same period.
A New York Federal Reserve survey that earlier this year showed people were more optimistic than a year ago and expected more improvement in the year ahead has since moved in the other direction, even as inflation has slowed further and rate cuts have become more likely.
The University of Michigan’s consumer confidence index had been improving, but has declined in recent months and remains below its pre-pandemic level.
The latest household “pulse” surveys by the U.S. Census showed that the share of those reporting difficulty paying household expenses in the past week has declined since 2022, when inflation peaked, but has improved little recently.
In his press conference after last week’s rate cut, Federal Reserve Chairman Jerome Powell said his goal was to keep the economy between the central bank’s two objectives: stable inflation and a healthy labor market. To do so, credit will be eased, but not at a guaranteed pace.
“This is the beginning of that process,” Powell said. “The direction… is toward a state of neutrality, and we will move as quickly or as slowly as we see fit in real time.”
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