Fed cuts rates for the first time in four years – here’s what that means for your wallet

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The Fed’s rate cut will lead to better interest rates for borrowers. (iStock)

The Federal Reserve cut the fed funds rate by half a percentage point on Wednesday, a move largely anticipated by economists as inflation remains sustainable toward a 2% target rate.

The central bank announced it would cut the federal funds rate by 50 basis points to a range of 4.75% to 5% as it focuses on rising unemployment. The August jobs report showed a net gain of 142,000 jobs and an unemployment rate of 4.2%. The central bank predicted that the unemployment rate will rise to 4.4% and stay there. Federal Reserve Chairman Jerome Powell said at a news conference on Wednesday that the US labor market is solid and the interest rate cut is aimed at maintaining its strength.

Inflation rose 2.5% in August, the smallest increase in 12 months since February 2021. Core inflation, which excludes more volatile food and energy prices, rose 3.2% and rose 0.3% in August monthly basis.

“The FOMC projections highlight that inflation is returning to target faster than the committee expected in June and that the unemployment rate has moved higher and is likely to remain higher than expected,” said Mike Fratantoni, Senior Vice President and Vice President of the Mortgage Bankers Association. Chief Economist. “While the U.S. economy is not likely to be in a recession, the U.S. economy will likely enter a period of slower economic growth.”

The Fed is expected to continue cutting rates this year and has indicated that if the economy develops as expected, the federal funds rate could be reset to 4.4% by the end of this year and 3.4% by the end of 2025.

“We are now at the beginning of a Fed rate cut,” said Voxtur CEO Ryan Marshall. “We know the Fed will continue to cut rates throughout the year to keep the economy as strong as possible, but how far are they willing to go? We think they will continue to cut until interest rates hover at 5% unless there is a strong economic event such as a big increase in unemployment. In that case, the Fed will become even more aggressive in cutting rates.”

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The mortgage market has already priced in cuts

For mortgages, that rate cut likely won’t make much of a difference, as this expected cut has already been factored into interest rates, which have fallen to nearly 6% in recent weeks, according to Freddie Mac. But with the Fed signaling that more rate cuts could follow, mortgage rates could fall further.

The lower mortgage rate environment has led to more refinancings and some additional purchasing activity in recent weeks. About four million homes have a refinancing option, with rates falling closer to 6% and more in the pipeline as the Fed begins its easing cycle, according to CoreLogic chief economist Selma Hepp.

“It’s important to note that lower rates have been a hot topic for some time, and potential homebuyers are on the sidelines waiting for lower rates and improved affordability,” Hepp said. “With interest rates falling over the past four weeks, data from CoreLogic shows that pending home sales are finally showing consistent improvement over last year’s activity.”

But high interest rates aren’t the only challenge buyers face; the housing market has also been plagued by low inventory, which has helped keep prices high even as demand for housing has declined.

“The Fed is trying to stimulate housing construction while the economy is still in somewhat of a good place in terms of inflation and consumer confidence,” said Percy.AI founder and CEO Charles Williams. “They will have to cut rates even further to create a boom in mini-refinances, and builders are now building more starter homes. So with additional interest rate cuts later this year, there will be a recovery in the housing market in 2025 in terms of both existing and new home sales. .”

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Consumer portfolios are getting a break

The rate reduction brings much-needed relief to consumers who increasingly rely on credit products. According to a recent TransUnion report, bank card balances increased 4.4% year over year in the second quarter of 2024.

The rate cut would give borrowers options and could also prompt banks to expand lending to a larger share of the consumer population, said Michele Raneri, TransUnion vice president and head of U.S. research and advisory.

“The current reduction in interest rates could ultimately mean consumers see lower monthly payments,” Raneri said. “It may also allow many consumers to refinance higher-interest debt into a lower-interest credit product, such as a personal loan or home equity loan.”

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