Fed rate cuts will put money in pockets, but a change in mood could take time By Reuters

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – Even before the Federal Reserve approved a huge half-percentage-point interest rate cut last week, financial markets began cutting credit to households and businesses as they bid lower mortgage rates, cut corporate bond yields and reduced what consumers pay for personal, auto and other loans.

How quickly that process will continue now that the US central bank’s first interest rate cut is on the books is unclear, particularly if the easing of credit conditions will become tangible to consumers in ways that will change attitudes about the economy going forward by the November 5 US presidential election.

Recent surveys suggest that while the pace of price rises has slowed dramatically, the public’s mood is still battered by nearly two years of high inflation – even as falling rates signal that chapter in recent economic history is closing and it will start to get cheaper to people. borrow money

“My daughter has been trying to buy a house for years and she can’t,” said Julie Miller, who works at her son’s electric company in Reno, Nevada, a state where home prices have risen rapidly during the pandemic. COVID-19. One of seven key battleground states in the presidential race, Nevada is hotly contested by Vice President Kamala Harris, who replaced President Joe Biden as the Democratic nominee, and former President Donald Trump, the Republican challenger.

If housing costs bother Miller’s daughter, higher prices at Taco Bell have prompted Miller to cut back on regular Friday night trips to the fast-food retailer with her granddaughter and left her leaning toward voting for Trump for that “I don’t think Biden. he did a great job with inflation.”

Harris’ supporters had similar concerns about high prices, even as they vouched for her as the best candidate to fix the problem.

THE COST OF THE LOAN DOWN

The Fed’s September 18 rate cut is likely to be followed by more, with a cut of at least a quarter of a percentage point expected when policymakers begin their next two-day policy meeting, a day after the US election.

Just as rate hikes are due to a higher cost of credit for families and businesses, discouraging them from borrowing, spending and investing to reduce inflation, the reductions in borrowing costs change the calculus for potential homebuyers and businesses, especially for small businesses that want to finance new equipment or expand production.

Looser monetary policy, which the Fed has signaled is on the way, has already put money back in people’s pockets. The average rate on a 30-year fixed-rate mortgage, the most popular home loan, for example, is approaching 6% after approaching 8% just a year ago. Redfin (NASDAQ: ), a real estate firm, recently estimated that the median payment for homes sold or listed in the four weeks through Sept. 15 was $300 less than the highest recorded in April and nearly 3% lower than a year ago. .

But with that adjustment already made, “mortgage rates are likely to remain relatively stable over the next two weeks,” Chen Zhao, an economist at Redfin, wrote in a post on the company’s website.

Indeed, according to the Fed staff’s baseline estimates, mortgage rates are likely to settle somewhere in the mid-5% range, meaning that most of the reduction has already taken place.

Banks began lowering the “base rate” they charge the most creditworthy borrowers to match the Fed’s rate cut. Other forms of consumer credit – car and personal loans where households could benefit from a better deal – have changed only marginally so far and it may take longer for banks to move away from charging higher finance charges.

Investors and economists saw last week’s rate cut as less important than the message it sent about a central bank prepared to loosen credit and confident that recent high inflation would not recur.

Inflation actually saw one of its fastest falls ever, with annual consumer price index growth falling from more than 9% in June 2022 to 2.6% year-on-year last month. The Fed’s preferred price index for personal consumption expenditures rose at a 2.5 percent rate in July, close to the central bank’s 2 percent target.

SOUR FEELING

The US economy performed reasonably despite fears that the labor market may be on the verge of weakening.

New jobless claims remain low and fell unexpectedly in the most recent week, while the jobless rate, at 4.2 percent in August, rose from a year ago but is around the level it The Fed sees it as sustainable without generating additional wage and price pressures. . A Philadelphia Fed manufacturing index rose recently and retail sales for August rose despite expectations for a decline.

But none of this led to a decisive change in public sentiment.

The share of Americans who believe the economy is heading in the right direction rose to 25 percent in August from 17 percent in May 2022, according to the Reuters/Ipsos poll. However, the share that sees the economy on the wrong track fell to 60% from 74% over the same period.

A New York Fed survey that earlier this year showed people feeling better than a year ago and expecting more improvement next year has since moved in the other direction, even as inflation has slowed and more and a rate cut became more likely.

The University of Michigan’s consumer sentiment index improved but then fell in recent months and remains below pre-pandemic levels.

The latest US Census “pulse” surveys of households showed that the share of those who reported having trouble paying household expenses in the past week has fallen since 2022, when inflation peaked, but has seen a small improvement recently.

In his news conference after last week’s interest rate cut, Fed Chairman Jerome Powell said his goal was to keep the economy on track between the central bank’s twin goals of stable inflation and a healthy labor market. To this end, credit will ease, but without a guaranteed pace.

“This is the beginning of this process,” Powell said. “The direction … is toward a sense of neutral, and we’ll move as fast or as slow as we think is appropriate in real time.”