Cutting interest rates by half a percentage point may not sound like a lot, but it can have a big impact on the economy. On Thursday, the day after the cut, the S&P 500 shot up 1.7%. The Dow was up 1.3%.
The Federal Reserve has not cut interest rates in four years. Its action this week caught some people by surprise.
“And half a point wasn’t even on the table as early as the beginning of July,” said Miro Copic, KPBS business commentator and co-founder of Bottom Line Marketing.
Copic said one strong force behind the Fed's decision was falling inflation rates, which made fighting inflation with high interest rates a diminishing motivation.
“They have been successful in bringing it down from 9.1% to 2.5% percent in the latest inflation report earlier this month,” he said.
Supply chain shortages, tariffs and stimulus payments to consumers caused inflation to rise to a troubling level in 2022, Copic said. But lately, concerns about inflation have given way to concerns about the weak job market.
“So there are fewer jobs that are available. At the top of the pandemic there were 12 million jobs available and that’s a record. It’s still a record that there are 8 million open jobs today. But it’s certainly a lot less than it was at its peak,” he said.
Copic expects to see interest rate reductions make it easier to secure a loan to buy a car and reduce interest payments on credit cards.
The impact of the Fed’s rate cut on home mortgage interest rates is indirect but considerable. Stephanie Lloyd is a San Diego real estate broker. She said lower interest rates for home mortgages could lead to lower home prices. But that’s not always the case.
“In 2021 when the rates were at historic lows, that created an absolute frenzy in the market, which, you know, boosted the market and people were paying significantly higher than list price. So it’s a balancing act here,” Lloyd said.
But if the Federal Reserve follows this week’s interest rate cut with one in December and another in the beginning of 2025, it could really reduce mortgage payments if people refinance their homes.
Copic said those people could save as much as $12,000 a year on their home payments.
“And, you know, that’s a lot of grocery dollars,” he said.
The next meeting of the Federal Reserve Board is scheduled for Dec. 17-18.
