The Rate Cuts Are Here!
September 20, 2024
High rates have been the reality for prospective borrowers in recent years. After ultra-low interest rates spoiled American borrowers in 2020, inflation drove the Federal Reserve to contractionary monetary policy. High rates tamed inflation, but they also created a difficult environment for many. With high interest rates putting housing and other large purchases out of reach for many Americans, Wednesday’s rate cut comes as welcome news.
With the 50 basis point cut, the Federal Reserve took an aggressive approach. Some expect a 25 basis point cut, which, while still being expansionary monetary policy, would have indicated that the Federal Reserve is taking a slower pace. The market appeared unsure of how to respond to the news. While one might assume rate cuts would be a promising catalyst to support economic growth, the major indices, after briefly jumping intraday, closed in the red Wednesday. However, Thursday, markets roared, with the S&P 500 closing up 1.70% at a record high. The sequence of returns on Wednesday and Thursday makes their causes unclear: if the Thursday jump was in response to rate cuts, why did it happen a day later rather than when the cuts were announced?
The coming months will test the resilience of the American economy. With rates descending, economists and businesses will be hoping for strong consumer spending (especially into the holiday season), an important driver of the economy. Whether the rate cuts will be enough remains to be seen, but there are certainly many on the sidelines anxiously waiting to watch a lower interest rate environment unfold.
Further, the housing market’s sensitivity to rate cuts will make for an interesting period in the real estate world. While many homeowners sit on fixed, ultra-low rate mortgages obtained before rates jumped, other more recent buyers are making payments to service loan rates around 8%. Borrowers who fall into that category are likely hopeful that the pain from their high-rate mortgages will soon be a thing of the past. Unfortunately, the timetable for when rates will fall enough to substantially alleviate stress in these new homeowner households has no guarantee.
The Federal Reserve took a major step forward by cutting rates 50 basis points on Wednesday, regardless of whether or not the stock market’s reaction supports that. In addition to watching consumer spending, eyes will be on housing, where the onset of high interest rates in 2022 paralyzed many prospective buyers and forced others into expensive payments with the hope of a low-rate refinance in the near future. In short, the Federal Reserve has made its move, and now it is time to watch the economy respond.