On September 18, 2024, the Federal Reserve’s Federal Open Market Committee (FOMC) made a significant move by lowering the benchmark federal funds rate by 0.50%, bringing it to a range of 4.75% to 5.0%. This marked the first rate cut since the Fed aggressively raised rates from March 2022 to July 2023 in an effort to control inflation. This long-anticipated policy shift hints at the possibility of achieving a "soft landing," a rare feat of reducing inflation without triggering a recession. The decision carries wide-reaching implications for consumers, businesses, and investors alike.
1. Why Did the Fed Cut Rates in September 2024?
The Federal Reserve operates under a dual mandate: maximizing employment while maintaining stable prices. Over the last few years, controlling inflation has been a priority as rising prices became a significant threat. However, recent data suggests that inflation is now closer to the Fed’s target of 2.0%, creating room for a shift in policy.
Federal Reserve Chair Jerome Powell emphasized in his post-meeting conference that “the labor market has cooled from its formerly overheated state,” and inflation, once as high as 7%, had dropped to an estimated 2.2% by August 2024. These indicators allowed the Fed to pivot, balancing the risks of inflation and slowing economic growth more evenly.
2. Employment Trends and Economic Health
The labor market has shown signs of softening, with job gains slowing considerably and unemployment rising from 3.8% in March to 4.2% in August 2024. Powell noted that while employment data remains relatively strong, the recent uptick in unemployment suggests that downside risks to the economy have increased.
Despite these challenges, the broader economic outlook remains optimistic. The U.S. economy grew by a robust 3.0% annual rate in the second quarter of 2024, and similar growth is expected in the third quarter based on forecasts from the Atlanta Fed’s GDPNow model.
3. Impacts on Borrowers: Relief in Sight
One of the most immediate effects of lowering the federal funds rate is reduced borrowing costs. Lower rates are likely to benefit a range of loans, from mortgages to credit cards.
3.1. Prime Rate and Consumer Loans
The prime rate, which banks charge their best customers, often moves in tandem with the federal funds rate. Consequently, loans such as small-business financing, home equity lines of credit, auto loans, and credit cards tied to the prime rate should see lower rates soon after the Fed’s decision. Consumers carrying variable-rate debt—such as adjustable-rate mortgages or credit card balances—may start to see reduced monthly payments within a couple of billing cycles.
3.2. Mortgage Rates and the Housing Market
Mortgage rates, influenced by a combination of factors including Fed policy, inflation expectations, and government bond yields, have already reacted positively to the Fed's rate cut. The average 30-year fixed-rate mortgage fell to 6.09% as of September 19, 2024—the lowest level in over a year. This marks a significant drop from a peak of 7.22% in early May.
While prospective home buyers are seeing improved affordability, it’s uncertain whether mortgage rates will continue to fall. Some of the expected reduction in rates may already be "priced in" to the market, suggesting that future decreases could be limited.
4. Too Much Cash? How Savers May Be Affected
For savers, higher interest rates over the past couple of years have provided excellent returns on high-yield savings accounts and certificates of deposit (CDs). However, the recent rate cut may signal the beginning of a decline in these yields. While savers may not notice an immediate drop in interest earnings, those with large cash holdings might want to consider locking in today’s relatively high rates through longer-term financial products like CDs or bonds with fixed returns.
4.1. Investment Considerations Amid Rate Changes
Investors with excess cash savings might also consider shifting some funds into bonds, particularly those that mature in a few years when the money is likely to be needed. Stocks, while offering the potential for higher long-term returns, involve greater risk and are prone to volatility. For long-term investors, holding onto stocks during rate adjustments can be a reasonable strategy, but only if they are prepared for fluctuations.
5. Rate Cuts and a Strong Economy: A Unique Scenario
Traditionally, the Federal Reserve has cut rates to stimulate a weakening economy, but that’s not the case this time. Powell explicitly stated, "The U.S. economy is in a good place. And our decision today is designed to keep it there." The September rate cut is intended to prevent the job market from deteriorating further rather than jump-starting a sluggish economy.
6. What’s Next for Fed Policy?
The September rate cut is likely just the beginning of further reductions in 2024 and 2025. According to FOMC projections, the federal funds rate could be cut by another 0.50% by the end of 2024, followed by an additional 1.0% in 2025. The Fed’s goal is to reach a neutral stance—where interest rates neither stimulate nor hinder economic growth.
However, monetary policy changes take time to affect the broader economy. Borrowing costs, consumer spending, and business investments will not adjust overnight. The Fed is prepared to make decisions on a meeting-by-meeting basis, closely watching economic data to assess the balance of risks.
7. The Role of the FDIC in Protecting Savers
It’s important for savers to understand the protection offered by the FDIC. Bank savings accounts and CDs are insured up to $250,000 per depositor, per institution, meaning that these products provide a degree of safety even if interest rates decline. On the other hand, investments in bonds or stocks carry risks, with fluctuating returns and principal values that can change with market conditions.
Conclusion: Navigating the New Economic Landscape
The Federal Reserve’s September 2024 rate cut is a crucial moment for the economy. While it brings relief for borrowers and could sustain economic growth, savers and investors need to adjust to the changing interest rate environment. As the Fed continues its cautious approach, monitoring the balance between inflation and employment risks, consumers, businesses, and investors should stay informed and plan accordingly.
