Americans expect the Fed to lower interest rates

Consumers, homebuyers, businesses and politicians in the US have been waiting for months for the Federal Reserve to cut its benchmark interest rate for the first time in two decades.

Kelly Mardis, owner of Marcel Painting in Arizona, said about 25% of his business comes from home renovations. But when the Fed started raising interest rates in March 2022, his customers dropped off quickly. The housing market contracted, forcing Mardis to lay off half of his 30 employees and endure the toughest time in 14 years.

With the Fed set to cut interest rates on September 18, Mardis is hopeful things will improve. That move will lead to lower interest rates on mortgages, autos, credit cards, and business loans. “I’m 100 percent sure that this will make a difference. I’m looking forward to it,” Mardis said.

Brittany Hart, owner of a software consulting firm in Phoenix that works with loan brokers, asset managers and banks, is seeing a lot of potential clients interested in using new software to increase efficiency, as they expect the housing market to pick up.

Hart has begun looking for three new staff to help with the expected increase in workload, adding to her current team of about 20. “This is an early sign that the housing market is returning to normal,” she said.

For U.S. consumers, lower interest rates have helped them refinance high-interest debt — mostly credit cards — into lower-cost personal loans, which should help ease their financial burden, said Michele Raneri, head of research at credit monitoring firm TransUnion.

The housing market is also expected to be more buoyant. The average 30-year fixed mortgage rate is now 6.2%, its lowest in 18 months, according to Freddie Mac. As mortgage rates fall below 6% thanks to the Fed’s easing, Raneri expects real estate transactions to pick up as more homeowners look to sell. “That starts to ease the bottleneck we’re having with low housing inventory,” Raneri said.

However, there is still much uncertainty about this week’s Fed meeting. How much lower will they cut rates from their current 5.3%? Will the Fed continue to ease at its next meetings in November, December and 2025? Can lower rates boost an economy that is growing but showing signs of slowing?

Fed Chairman Jerome Powell has stressed that they are prepared to cut interest rates to support the job market and achieve a “soft landing” — keeping inflation in check without triggering a recession. But that won’t be easy.

Kathy Bostjancic, chief economist at Nationwide Financial, said the Fed’s rate cuts have indeed helped reduce borrowing costs. But questions remain about whether they’re moving quickly enough to create the “soft landing” that everyone is hoping for.

Some economists expect the Fed to cut by half a percentage point instead of a quarter. But that could also make the market worry that the Fed sees the economic outlook as worse than it actually is. Gennadiy Goldberg, head of interest rate strategy at TD Securities, warned that a 50 basis point cut could send the wrong message to the market that the Fed is overly concerned.

What will matter is not just the cut on Wednesday but also the pace of monetary easing that follows. If the Fed concludes that inflation is under control, interest rates may need to be brought back to a “neutral” level of around 3%, which would require a series of further cuts.

Many experts say the US economy needs even lower interest rates. Diane Swonk, chief economist at KPMG, notes that employment has increased by an average of just 116,000 jobs per month over the past three months, matching the sluggish growth seen after the 2008-2009 crisis. The unemployment rate has risen nearly a full percentage point to 4.2%.

“The situation is still very fragile with no strong job growth. The labor market is much weaker than we thought,” Swonk said. But the Fed’s rate cut could provide a crucial boost to the economy at a time when it is needed most.