Washington, Sept. 19, 2024 – The Federal Reserve cut interest rates Wednesday by the biggest amount in 16 years.
The 50 percentage points reduction will make borrowing money less expensive, taking some of the pressure off consumers’ wallets.
Wednesday’s cut brings benchmark borrowing costs down to between 4.75 percent and 5 percent.
While the Fed rate does not directly affect rates for loans, credit cards and mortgages, it strongly influences them.
Lower rates are also seen as generally good for businesses – so as they fall, the stock market rises. That means today’s news will help boost 401(K)s in coming months.
The rate cut was an aggressive start to the central bank’s first easing campaign since the early days of the Covid-19 pandemic in 2020. Normally, the come in smaller 0.25 basis point increments.
The Fed last made such a big cut in the Great Recession that began in 2008.
Chairman Jerome Powell said two more cuts are almost certain to happen by the end of the year – in a boost for Americans.
Stock markets initially soared on the rate cut, though they fell back in late afternoon trading as traders banked profits.
In his press conference after the announcement, Powell was asked about the jobs market in the US.
A bad jobs report released in August was cited as an indicator that America might slump into a recession.
But Powell explained that migration into the US was having an effect on unemployment.
See below for more on Powell’s comments on migration – as well as all the updates from today as the news happened. There are also helpful explanations for what the rate cut means for your money – from your 401(K) to your savings account.
Influx of immigrants has impacted unemployment rate, Powell says
When asked about job creation being just over 100,000 per month for the last three months, Powell noted that immigration into the US plays a part in job growth.
‘Job creation depends on inflows,’ said Powell. ‘So if you’re having millions of people come into the labor force and you’re creating 100,000 jobs, you’re going to see unemployment go up.
‘So it really depends on what’s the trend underlying the volatility of people coming into the country,’ he continued.
‘We understand there’s been quite an influx across the borders, and that’s been one of the things that has allowed the unemployment rate to rise.
‘And the other thing is just the slower hiring rate which is something we also watch carefully. So, it does depend on what is happening on the supply side.’
More cuts coming this year
Fed projections showed policymakers see the benchmark rate falling by another half of a percentage point by the end of 2024.
The size of the decreases, which will take place at the central bank’s next meetings in November and December, is dependent on inflation and job growth.
‘The updated summary of economic projections show that the committee expects the unemployment rate to rise into year end and for inflation to continue lower,’ said eToro US investment analyst Bret Kenwell.
‘If that comes to fruition, that will pave the path for lower rates moving forward.’
But experts warn that consumers do not need to make any hasty decisions.
Although taking action now to try to capitalize on lower rates, like shifting money out of a certificate of deposit or refinancing a mortgage, ‘might be warranted for some, you shouldn’t feel obligated to completely change up your financial strategy just because rates move lower,’ Jacob Channel, senior economist at LendingTree, told the Associated Press.
‘Act cautiously and responsibly,’ Channel said, ‘and don’t make any rash decisions based on a single Fed meeting or economic report.’
Retirement expert tells Americans to ‘stay the course’
Peter Gallagher, managing director of New York-based Unified Retirement Planning Group, says Americans should review their retirement plans and their overall risk tolerance to help make sure that they are comfortable with ‘staying the course’ during any potential market fluctuations following the Fed decision and the upcoming presidential election.
‘Timing the market is impossible and should be avoided at all costs. Especially in retirement accounts,’ he told DailyMail.com.
Based on historical relatively low tax rates, he also recommended working with your financial advisor and your tax advisor to consider a partial or full Roth IRA conversion, especially if you are in a higher tax bracket.
‘Money that you may use to pay the taxes will not earn as much in the bank interest rates decrease and therefore may be better used for a Roth IRA conversion,’ he added.
Stocks close lower
The stock market closed down Wednesday after a volatile session following the Fed’s interest rate announcement.
The outsized rate cut was cheered initially by traders, though it did raise concerns the Fed was trying to get ahead of potential economic weakness, CNBC reported.
The Dow Jones Industrial Average slid 0.25 percent, the S&P 500 dropped 0.29 percent and the Nasdaq Composite closed down 0.31 percent.
Powell rejects politics
When asked about the political optics of the Fed’s decision, Chair Powell said policymakers do not take politics into account.
They care about doing the best thing for the economy and the American people, he said.
It comes after former president Donald Trump claimed any move by the central bank ahead of November’s election would be political.
Hedge fund billionaire John Paulson, who has backed Trump, said this decision ‘begs the question if the timing was intended to boost Vice President Harris’ campaign.’
‘I believe they should have waited until November. The Fed should have stuck with its traditions and stayed out of presidential politics.’
Fed Chair Jerome Powell speaks
Fed Chair Jerome Powell has spoken at a press conference following the decision announcement.
‘We concluded that this was the right thing for the economy and the people we serve,’ he said of the central bank’s decision to cut interest rates by half a percentage point.
‘Our patient approach over the past year has paid dividends,’ he told reporters.
‘Inflation is now much closer to our objective, and we have gained greater confidence that inflation is moving sustainably toward 2 percent.
In its policy statement, the Fed said the decision reflected that the central bank ‘judges that the risks to achieving its employment and inflation goals are roughly in balance.’
‘With auto loans, it’s good news that rates will be falling, but it doesn’t change the basic blocking and tackling of things, which is that it’s still really important to shop around and not just accept the rate that a car dealer would offer you at the dealership,’ Greg McBride, analyst at Bankrate, told AP News.
‘It’s also really important to save what you can and be able to try to put as much down on that vehicle as you can.’
Rate cuts and the avoidance of a recession will lead to lower auto loan rates, he said, at least for borrowers with strong credit profiles.
For those with lower credit profiles, double digit rates will likely persist for the remainder of the year.
Robert Frick, corporate economist for Navy Federal Credit Union, said that while he thinks a rate cut will work its way into auto loans, it probably won’t happen immediately and people with higher credit scores will likely benefit first.
Loans for new vehicles right now are averaging 7.1 percent, with used vehicle loans at a much higher 11.3 percent, according to Edmunds.com.
High prices and rates have also led to more delinquent payments and defaults on auto loans, especially among people with lower credit scores. As a result, Frick told AP News, many lenders will probably try to keep rates high to cover potential losses.
‘Rates will be coming down, but we shouldn’t expect them to come down quickly overall,’ he said.
Frick suggests waiting for additional Fed rate cuts to come through if possible, especially if you’re buying a used vehicle.
What does this mean for mortgages?
The Fed’s benchmark interest rate does not directly affect mortgage rates, but home loan costs tend to dip alongside rate cuts.
Mortgage rates have already fallen to their lowest level since February 2023.
The average 30-year fixed rate mortgage is now 6.20 percent, as of latest Freddie Mac data from September 12.
The rate cut should mean mortgage rates continue their downward trajectory, providing a boost for those looking to refinance or buy a home.
Experts hope this would begin to get the stagnant housing market moving.
The ‘Oracle of Wall Street’ Meredith Whitney told DailyMail.com earlier this year that rates need to drop below 6 percent to kickstart the frozen housing market.
Elevated mortgage rates have been a deterrent for homebuyers for the last several years, while sellers ‘locked’ into cheaper, pandemic-era loans have been reluctant to sell.
A half-point rate cut should mean financing costs go down, creating a flood of homes for sale, and bringing property prices down, CNN reported.
Speaking following the decision, Fed Chair Jerome Powell said as the central bank normalizes interest rates, we should see the housing market normalize.
What does this mean for my 401(K) and savings?
Workplace retirement accounts tend to be invested in major indices including the S&P 500 and the Dow Jones Industrial Average, so are impacted by major stock market moves.
Markets jumped following the announcement that the Fed had cut interest rates by 50 basis points, in good news for Americans’ 401(K)s.
Americans holding money in high-yield savings accounts, however, are likely to be the most disappointed by the interest rate cut.
The competitive rates offered by some banks are likely to come down in line with the Fed’s move, but by how much and how quickly will vary depending on the provider.
‘As attractive as yields on savings instruments have recently been, it’s wise not to hold too much in cash because these are short-term instruments and their yields are ephemeral,’ Christine Benz, director of personal finance at Morningstar, told AP News.
‘The really great yields that we’ve had recently may go lower.’
If you don’t have a need for cash right away, you can continue to lock in what are ‘still pretty decent yields on offer,’ she added.
What does this mean for credit cards?
The Fed has held interest rates at a 23-year high since July 2023, which has made borrowing money expensive and piled pressure on American households.
The cut will have an impact on many aspects of your financial life – but consumers will have to wait longer to feel relief in some areas than in others.
Rates for credit card and personal loans should finally decrease, providing some respite for borrowers.
The average APR offered with a new credit card is currently 24.92 percent, according to LendingTree.
The decrease in rates is welcome respite for consumers who have relied more heavily on credit cards to cope with elevated prices after several years of inflation.
Total credit card balances in the US have surpassed $1 trillion.
But how much credit card lenders will cut rates by is unknown.
APRs are set by banks, so any decrease will not be instant and will depend on the bank and the type of card.
Markets surge following announcement
The stock market has jumped following the Fed’s announcement that it cut interest rates by an aggressive half percentage-point.
The move marked the end of a rate-hiking cycle for the central bank which began in 2022.
The S&P 500 rose 0.8 percent, the Dow Jones added 0.9 percent, while the Nasdaq Composite jumped by around 1 percent.
Stocks ticking up is good news for Americans’ 401(K) retirement accounts, which tend to be invested in the major indices.
Fed cuts rates by half a percentage point
The Federal Reserve has cut interest rates by 50 basis points.
This is the first time it has cut rates by this much at one time since the midst of the financial crisis in late 2008.
It is an aggressive start to the central bank’s first easing campaign since the early days of the Covid-19 pandemic in 2020.
This brings benchmark borrowing costs down to between 4.75 percent and 5 percent.
‘The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,’ the post-meeting statement said.
Mixed economic data going into decision
The Fed is grappling with mixed economic data as it makes its rate cut decision.
Inflation is heading in the right direction toward the central bank’s 2 percent target.
Latest data from the Bureau of Labor Statistics revealed consumer prices were up 2.5 percent from a year earlier in August.
This is down from a 2.9 percent annual rate in July – and is the lowest rate of yearly price growth since February 2021.
But recent reports on employment and manufacturing have revealed some signs of softening, which have been cause for concern for some economists.
Markets were badly shaken by a weaker-than-expected jobs report in July, which saw unemployment increase to the highest level since October 2021.
Investors are unsure about outcome
Fed watchers are undecided as to how big of a cut the central bank could make to interest rates at the close of its latest meeting Wednesday.
Typically, markets have a general idea as to what will happen at the meeting, but that is not the case this time.
‘I hope they cut 50 basis points, but I suspect they’ll cut 25. My hope is 50, because I think rates are just too high,’ Mark Zandi, chief economist at Moody’s Analytics, told CNBC.
‘They have achieved their mandate for full employment and inflation back at target, and that’s not consistent with a five and a half percent-ish funds rate target. So I think they need to normalize rates quickly and have a lot of room to do so.’
There is reportedly an unusual division among Fed policymakers who have typically voted the same way on interest rate decisions.
‘My guess is they’re split,’ former Dallas Fed President Robert Kaplan told the outlet earlier this week.
‘There’ll be some around the table who feel as I do, that they’re a little bit late, and they’d like to get on their front foot and would prefer not to spend the fall chasing the economy.’
There will be others, he added, that want to be more careful and manage risk.
How much will the Fed cut interest rates by?
Investors are waiting anxiously to see whether the Fed cuts by a cautious quarter percentage point, or a more bold half percentage point – a move it has not made in 16 years.
The Fed has not lowered interest rates at all since 2020.
And it has not lowered borrowing costs by a half percentage point at one time since the midst of the financial crisis in late 2008.
As of writing, investors were predicting a 57 percent chance of a 50 basis point cut, and a 43 percent chance of a 25 basis point cut, according to the CME FedWatch Tool.
An interest rate cut of any size will have an impact on Americans’ finances – from credit cards and savings accounts to 401(K)s and mortgages.
The Fed has held benchmark borrowing costs at a 23-year high between 5.25 percent and 5.5 percent since July 2023, following an aggressive rate hiking campaign to curb inflation. (The Mail Online)
