The Federal Reserve is gearing up for its second interest rate cut of the year on Thursday, just weeks after its unexpected jumbo cut in September. Economists anticipate that the Fed will trim its key federal funds rate by 0.25 percentage points, setting the new range between 4.5% and 4.75%. With inflation easing and borrowing costs still historically high, this move aims to recalibrate the Fed’s policy amid a moderating economic outlook.
The decision is set to be announced at 2 p.m. ET, followed by a press conference with Fed Chair Jerome Powell, who is expected to navigate questions about the Fed’s broader strategy for 2024 and beyond. The recent data signals a promising trajectory: last month, inflation dipped close to the Fed’s 2% target. This relief from earlier spikes in inflation gives the Fed room to ease rates, hoping to lighten the burden on consumers and businesses strained by high borrowing costs.
Powell and the Fed committee face a nuanced landscape as they look beyond Thursday’s expected cut. Economists foresee a sequence of gradual rate cuts that could persist into 2025, potentially bringing the benchmark rate down to around 3.4% by June. “For now, however, the effect of these cuts won’t be very noticeable for consumers,” cautioned Matt Schulz, LendingTree’s chief credit analyst. He notes that while credit card rates have begun a modest decline, borrowers should temper expectations for immediate savings.
Mortgage rates present a similar story. Despite the Fed’s September cut, mortgage costs have crept up due to various market forces, including rising Treasury yields. The average 30-year fixed-rate mortgage is at 6.72%, slightly up from 6.08% in September. Treasury yields are influenced by concerns over increasing U.S. debt and market anxieties surrounding the upcoming presidential election. “Investors remain cautious, and until these uncertainties settle, mortgage rates may struggle to drop significantly,” said Jacob Channel, senior economist at LendingTree.
Meanwhile, financial markets await the broader implications of the Fed’s rate path as Powell addresses the press. The impact of these policy adjustments may also intersect with political changes, given the surprising outcome of recent U.S. elections. The Federal Open Market Committee will continue to prioritize economic stability, with an emphasis on staying above political influence. “The Fed will likely proceed cautiously, focusing on gradual economic recalibration without preempting any policies under the new administration,” noted Krishna Guha, head of global policy at Evercore ISI.
Beyond Thursday’s cut, the Fed may aim to refine its rate trajectory without creating undue volatility. Market indicators suggest more rate cuts through 2025, though some economists predict pauses to evaluate the economy’s response. Adding to this, the Fed has been reducing its balance sheet since June 2022, shrinking Treasury and mortgage-backed securities holdings by nearly $2 trillion. This “quantitative tightening” process is expected to continue for now, though the timeline for completion could be adjusted to complement the Fed’s rate cuts.
The question on everyone’s mind remains: how low will rates go? With market expectations for a gradual decline, consumers and businesses may not feel immediate relief. However, as these cuts accumulate, they could lower borrowing costs across sectors, eventually benefitting credit card holders, mortgage borrowers, and others in debt. However, experts like Bill English, former head of monetary affairs at the Fed, suggest that the central bank may want to pause soon and gauge the cumulative impact on the economy.
The current approach reflects the Fed’s careful balancing act: trimming rates to stimulate economic activity while monitoring inflation and market stability. For borrowers, patience may be key. As the Fed’s cuts compound, the effects on credit, mortgage, and loan rates will likely become more noticeable over time, potentially leading to tangible relief for consumers.
