Consumer Says: How the Fed's interest rate cut affects consumer finances

What's new in the economy?

• Last week, the Fed lowered its benchmark for interest rates by 50 basis points. While rates were anticipated to be reduced at the September meeting, the magnitude of the cut was highly speculated beforehand with many expecting the Fed might opt for a more conservative 25 basis point cut. Ultimately, the FOMC decided on the more accommodative monetary policy stance, signaling an end of an era in the fight against inflation.
• Why did the Fed choose the more accommodative monetary policy stance? In his press conference, Chair Powell cites the data releases between July’s meeting and September’s meeting as the reason why the committee decided to go with a ½ a percentage point decrease instead of 1/4. He calls out in particular the two jobs reports and the two inflation reports which painted a picture of a slowing labor market as well as inflation easing closer to the Fed’s 2% target.
• Where are interest rates heading for the rest of 2024? The Fed’s dot plot suggests 1 or 2 more cuts coming at the November and December meetings this year. This week, the Fed’s preferred measure of inflation, the PCE price index, will be released and will also give us a clue to where interest rate policy is headed: easing inflation means the Fed will be more comfortable lowering interest rates.

Consumer says...

• Why do interest rates matter? Morning Consult’s interest rate survey from this summer found that 2 out of 3 consumers believed that interest rates were too high, and of those, most of them have cut back on economic activity as a result, particularly spending on nonessentials. 
• Excess savings built up earlier in the pandemic had put consumer finances in a good place. But savings have dwindled quite a bit since then as consumers weathered several years of elevated inflation. For low- and middle-income consumers, savings continue to drop from the previous year, making these groups more financially vulnerable if they become unemployed.

• High interest rates make borrowing money more expensive. This is the case for all types of loans, but can be particularly damaging to consumers with certain kinds of outstanding debt like credit card debt, which on average charge higher rates than other types of loans. In 2024, a higher share of consumers reported holding credit debt for 12 months or longer, making paying down that debt more expensive and difficult, leading to higher chance of default.

Further reading:

• Briefly mentioned in this week’s podcast was our Housing Affordability report as well as our report on The Economy and The Election. Go check those out if you missed it!

Stay tuned! We'll be back discussing the latest econ news and our own research/insights on another episode two weeks from now on October 9th.