After their latest meeting, the US Federal reserve announced that they would be cutting interest rates down half a point; a first in 4 years. Though the 40-year highs of 7% inflation in 2022 have started to cool down to under 3% for the majority of this year, the 2.5% of last August is still well above the 2% inflation rate that the Fed is aiming at for a healthy economy. Moreover, the effects of hyperinflation can still be felt in many industries such as the job and housing market. This cut in interest had been much anticipated as inflation had caused home prices to continue to climb consecutively for an 11th month in June, while unemployment rates continue to see a gradual upward trend since the start of the year.
Predicted positive outcomes from this cut
After the cut, the Personal Expenditure Index readjusted its prediction from a 2.6% to a 2.3% and the end of the year from the current 2.5%. Also, the core PCE (Personal Consumption Expenditures Price Index) reading predicts the number to stay at 2.6% by the end of the year, though this is lower than their previous prediction of a rise to 2.8%.
The housing market is also likely to see some relief in the form of lower mortgages. During late June, the median home price in the US climbed up 5.8% from last year, hitting a record high of $419,300. In addition the current mortgage prices are the highest These high prices along with the high mortgage interest rates had pushed many prospective homebuyers to rent, while homeowners wishing to sell were also unable to because of these same mortgage prices. On top of all this, there is a continued high demand for homes which cannot be supplied due to homeowners unwilling or unable to sell their homes as well as a decrease in the amount of houses being built, all due to high interest rates.
Evidently, a decrease in interest rates would, in turn, decrease the amount of mortgage payments that homebuyers have to pay. This would allow many homeowners to sell their houses to prospective buyers, as well as allow firms to build more homes to meet the demand for houses. However, the cut in interest rates are unlikely to immediately affect the housing market as many lenders had already predicted and considered the Fed cut in their pricing. It is also important to note that lower housing prices should increase the demand for homes, in turn, once again limiting the supply to keep up with the strong demand.
On top of the housing market, the employment market can also potentially benefit from the lower interest rates. Unemployment is currently on an upward trend, and is likely to increase from a current 4.2% interest rate to 4.4% by the end of the year, higher than the 4% forecasted in July. Cutting interest rates is meant to allow more money to flow in the economy, which should allow for more job creation by firms.
Possible consequences of the cut
One of the few advantages of high interest rates is increased interest added on to savings accounts. This would be disadvantageous for those who store a lot of money in savings accounts, counting on the interest received from this money stored. This could especially affect retirees who now earn less interest from their savings account. Another consequence is deflation. While it is necessary during times of hyperinflation, this also means that the US economy will grow at a slower rate than originally predicted. The Fed predicts that the economy will grow by 2% for both 2024 and 2025, which is lower than the previous 2.1% growth prediction.
Many of these disadvantages do not seem to have many strong consequences however. Due to low interest rates, people are likely to take their savings out and spend it on other areas such as purchasing goods or investing in the market, both of which would help boost the economy. Moreover, many retirement savings accounts have a fixed interest rate for the time that they bought their certificates of deposit, leaving them mostly unaffected by this change in interest rates.
Overall, the cut in interest rates is likely to benefit the economy, preventing the continuation of hyperinflation which had caused many to fear a market crash. This will also allow Americans more opportunities to buy homes that they can afford as well as create more jobs for those still unemployed. Though the overall growth of the economy will slightly slow down, the overall health of the economy is likely to increase.
Written by Vi Lam Dinh
