How the Fed’s Next Move Will Affect Home Prices and Auto Loans

This week marks a significant moment for Americans as the Federal Open Market Committee is poised to announce its latest move regarding interest rates. It is widely expected that the Federal Reserve will implement a rate cut for the first time in four years.

The key question now revolves around the magnitude of the cut. According to the CME FedWatch tool, which gauges market predictions for interest rate changes, there is a near even split in expectations. As of Friday, there was a 51% probability of a 25-basis-point cut and a 49% chance of a larger, 50-basis-point reduction. The likelihood of the Fed maintaining the current rates is exceedingly low.

At a recent gathering of central bankers in Jackson Hole, Wyoming, Fed Chair Jerome Powell emphasized the necessity for a policy shift, stating, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The consumer price index (CPI) data released last Wednesday was a crucial piece of information leading up to the Fed’s meeting. August’s core CPI figures came in surprisingly high, which cast doubt on the possibility of a significant 50-basis-point cut. Such a reduction typically makes borrowing more affordable, potentially leading to increased spending and, subsequently, higher prices.

On the employment front, factors appear to support a rate cut. Although the unemployment rate dipped slightly in August, it remains elevated compared to recent levels, indicating a cooling job market. Lower interest rates could ease financial strain on companies, allowing them to allocate more resources toward hiring.

Many economists are optimistic that a “soft landing” for the economy—a scenario where inflation is brought under control without tipping the economy into a severe recession—might be within reach.

Michael Madowitz, the former director of macroeconomic policy at the Washington Center for Equitable Growth, shared his perspective. “This rate cut is great news for middle-class families,” he remarked. “It not only indicates that the Fed believes inflation is stabilizing but also suggests that the economy is positioned for more sustainable growth and job creation.”

However, the forthcoming rate cuts will not yield immediate results. Some sectors of the economy may feel the effects sooner than others, as the lag in response varies.

For instance, Alena McTier, a young consumer hoping to replace her 2017 car, expressed her eagerness for the Fed’s announcement on rate cuts. “I’ve been holding on to my car until I get a clear decision from the Federal Reserve. Once rates go down, I will explore my options,” she stated.

While immediate changes may occur, it could take time for relief to manifest across various sectors. Mark Hamrick, a senior economic analyst for Bankrate, explained that monetary policy takes time to permeate through the economy. He noted that banks would likely adjust their prime lending rates soon after the Federal Reserve’s decision, which will quickly reflect in credit card rates.

Credit card interest rates have reached historic peaks, with a report from the Consumer Financial Protection Bureau revealing that the average annual percentage rate has nearly doubled over the past decade, hitting 22.8% in 2023. Unfortunately, this means that individuals hoping to pay off credit card debts might not feel the easing effect of the rate cut immediately.

In the longer term, lower rates could decrease borrowing costs for small businesses. While reductions may also slightly lower expenses related to purchasing a new home or car, the immediate impact may be limited. The housing market’s reaction to rate cuts is complex and could lead to heightened demand and rising prices if many buyers rush to the market at once.

Nonetheless, many consumers are strategically planning their finances in anticipation of a rate cut. A survey by NerdWallet found that a significant portion of Americans intends to take action like purchasing a home or securing a loan once interest rates decrease. Almost 25% of U.S. adults said they plan to buy a car, and about 15% indicated they would consider buying a home.

Experts warn, however, that even with rate cuts, existing credit card debt will likely remain costly. Sara Rathner, a credit card expert at NerdWallet, stated, “Your credit card debt is going to remain expensive even if interest rates begin to decline.”

As the Federal Reserve prepares to announce its decision, the anticipation continues to build among consumers and businesses alike, all hoping for a positive shift in the economic landscape.

Source: Business Insider