The Journal. - The Fed Finally Cut Rates. What Does That Mean?

Episode Date: September 20, 2024

The Federal Reserve cut interest rates this week, after a two year battle with inflation. David Uberti explains how that will impact the economy and we hear from two couples about what they hope this means for their finances.  Further Listening: - A Fed Insider on the Looming Rate Cut  - What the Stock Market Panic Says About the Economy  - Trump Allies Draft Plans to Rein in the Fed  Further Reading: - Americans Are Desperate for Relief. The Rate Cut Is a Glimmer of Hope.  - The Fed Aims to Repeat Greenspan’s 1990s Masterpiece  - Fed Cuts Rates by Half Percentage Point  Learn more about your ad choices. Visit megaphone.fm/adchoices

This week, the American economy hit a major turning point. And all eyes were on Fed Chair Jerome Powell today as he announced the first interest rate cut in the U.S. in four years. The Fed opting to cut rates by a half a percentage point. Millions of Americans now looking ahead to lower borrowing costs. Central Bank also hinted at further reductions later this year. The move will bring down the cost of borrowing, including on mortgages and credit cards in the U.S. The Federal Reserve cut interest rates by half a percentage point. Welcome news to a

lot of people. People like Claire and Alessandro Sagala. On a personal level, I hope that that means that we will have more money for us and that we can put it towards our future. The Sagalas live in Seattle, and recently they were in the market for a new home. We wanted a town home with a garage. We definitely wanted three bedrooms. We both work from home and we would like to have a family one day. We wanted to be in a walkable location. We don't have a car so we were location was probably most important to us. Something just caught me there. You said you have

no car but you wanted a garage. Yes, yes. So we might get one in the future, but we also wanted a garage for storage. And that has been awesome for us. In February, the Sagalas found their dream townhome, garage and all. But there was a catch. Their mortgage rate was really high, almost 7%.

They bought the house anyway, even though it was more expensive than they wanted. Their plan was to refinance their mortgage as soon as the Fed cut rates. There were rumors that the Fed would start cutting rates. We didn't know when exactly, but we knew that sometime this year, the likelihood of that happening was relatively high. Now, the Sagalas are shopping around for a better mortgage rate.

I would like at the very least 6%, but we're going to try going for something as low as we can. If we can refinance in the next two, three months and get this 1% reduction in interest rate, we are looking into a reduction of monthly payments of approximately $1,000 a month, which for us would be quite significant. Yeah. What would you do with that extra grand a month? Mostly saving it and investing towards the future. Maybe a car for your garage? That too.

That too. The Fed's decision to cut interest rates was unequivocally good news for the Sagalas. But what if you're not buying a home? What if you have other kinds of debt? Or maybe you don't have debt, but you're getting squeezed by the high cost of rent, groceries, and everything else. Will the Fed's interest rate cuts help your finances? Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Friday, September 20th.

Coming up on the show, who will and won't benefit from this week's rate cuts. How do stop losses work on Kraken? Let's say I have a birthday party on Wednesday night, but an important meeting Thursday morning. So sensible me, pre-books a taxi for 10pm with alerts. Voila! I won't be getting carried away and staying out till 2. That's Stop Loss Orders on Kraken, an easy way to plan ahead. Go to kraken.com and see what crypto can be. of Joe can be. Not investment advice. Scripted trading involves risk of loss. See kraken.com slash legal slash ca dash pru dash disclaimer for info on Kraken's undertaking

to register in Canada. Looking for a collaborator for your career? A strong ally to support your next level success? You will find it at York University School of Continuing Studies, where we offer career programs purpose-built for you. Visit continue.yorku.ca. It's not often that the Federal Reserve cuts interest rates. For finance nerds, like us at the Wall Street Journal, it's a bit like early Christmas, which I guess makes Fed Chair Jerome Powell Santa?

Here's Santa on Wednesday making the big announcement. Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by a half percentage point. This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%. What Powell is saying here is that inflation has been tamed, at least for now. And so the Fed is lowering interest rates. This is a reversal.

For the last two years, inflation has stubbornly refused to slow. It was, in this now overly-done metaphor, the grinch of the economy. To fight it, the Fed aggressively raised interest rates. First in March of 2022. Today, in support of these goals, the FOMC raised its policy interest rate by one quarter percentage point. And then a bit more. Inflation is much too high. Against this backdrop, today the FOMC raised its policy interest rate by a half percentage point.

And then even more. Today the Federal Open Market Committee raised its policy interest rate by three quarters of a percentage point and anticipates that ongoing... The Fed kept raising rates until it hit a peak range of between 5.25 and 5.5 percent. That's the highest it's been in over two decades. And while that strategy seems to have brought inflation down, the high rates have also caused pain for some consumers. Over the past couple of years, as the Fed has raised interest rates, what did that mean for the economy, broadly?

When the Fed raises interest rates, they basically make it more costly to borrow money. That's our colleague David Oberty. He covers financial markets. Things like mortgages, things like auto loans, credit card rates, any way in which a consumer or a business borrows money, that has become more expensive over the course of time. And to sort of step back and sort of describe this in a more philosophical sense, interest rate hikes more or less shift power within the economy from borrowers to savers. So it creates winners and losers to some respect. Okay.

Can you break that down? Who are the winners of this economy? If you're one of those higher earning people, people who have a lot of money in the bank, you know, it's hard to beat this moment in time for you. You can buy a treasury bond that returns a really safe yield over the next two or five or ten years. You can get a five percent yield from money market funds for essentially doing nothing with your money. And that has really boosted overall wealth in the United States.

Okay, so those are the winners. What about the losers? So if you need to borrow money, if you're a business that has needed to invest in new equipment, if you're someone who uses a lot of credit cards to pay for your groceries, if you've wanted to buy a new house or a new car, this has been pretty painful for you because all of that costs more now than it did just a couple of years ago. David says that those who are accumulating wealth, the winners of high interest rates, they're driving consumer demand, using their extra cash to buy cars or go on vacation. As for those who aren't building wealth, they're also spending a lot, because prices are still

really high. So a growing number of them have to rely on credit cards to make purchases, and some are falling behind on their payments. Over the last year, around 9% of credit card balances turned delinquent, the highest rate in over a decade. Like I said, borrowing costs have gone up over the last couple of years, and particularly in early 2024, the rates of delinquency have really jumped at a way that has sort of stunned some analysts

and economists. So there are some people out there, depending on their situation, that have been really hurt by this moment. The combination of inflation and borrowing costs has really, really hammered them. Another thing that's worried the Fed as interest rates stayed high is that employment is weakening. Some businesses have gone through layoffs and others aren't hiring as much. Maybe they're holding on to workers more so than they were,

or maybe their business just isn't doing as well so they don't see any growth in the horizon so they're hiring less. Whatever the case is, like, people are slowing down a bit. The Fed keeps a close eye on job growth as a measure of how much the economy is slowing down a bit. The Fed keeps a close eye on job growth as a measure of how much the economy is slowing down. And so what that suggests to the Fed and to economics watchers is that, you know,

if the Fed sort of dials it back just a little bit, it makes it a little bit easier for businesses and consumers to invest in, you know, new house or, you know, new machinery or maybe a new business plan for next year, then maybe that can sort of moderate some of those recently concerning signs that we've seen, if not just continue some of the growth

that we've had over the last couple of years or so. The Fed hopes that cutting interest rates will spur economic growth, but some people won't see the upside for a while. That's after the break. I'm not going back to university to be your friend. I'm going so I can get Uber One for students. It saves you on Uber and Uber Eats.

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Savings may vary. Eligibility and member terms apply. When you're faced with a challenge, you don't back down. So when it comes time to level up your financial game, you'll know what to do. Rise to it and reward your good financial habits with the new BMO Eclipse Rise Visa Card. The credit card that takes you from bill payer to reward slayer. Get rewarded for paying your credit card bill in full and on time every month. Terms and conditions apply, click the banner or visit bmo.com slash rise to learn more. To better understand who will and won't benefit from rate cuts, I played a kind of game with

our colleague David Oberti. I want to run through some other costs and then maybe you can tell me how fed cuts will or won't impact them. Sure. So, rent has been going up. Will renters see rent go down? Go down not necessarily, but the Hope is that the in subsequent increases will be slower And I know that's that's not what a lot of people want to hear right and that sucks

They're clicking off already. They're like everybody who lives in like a big city like hates this, you know What about prices in grocery stores? What would the effect be? The sticker shock at the grocery store is very real, and that is unfortunately one of the things that probably won't change once the Fed starts lowering rates. And what about credit cards, especially people with credit card debt? The federal funds rate makes up a very small portion of overall credit card rates. Spoke to a credit analyst recently who said as a rule of thumb for a person who has $10,000

of credit card debt they carry over every month, a quarter point percentage cut by the Fed could only add up to maybe something like $2 off of their minimum payment. Granted, that's better than paying more, but until the Fed starts more significantly cutting down rates, credit cards aren't going to have a really huge impact and sort of lessening the cost impact on a lot of people. I spoke to a couple who aren't likely to see the benefits of these rate cuts, at least not right away. Clarissa and Michelle Cotabaron have been married for seven years.

They own a small restaurant called Eurasia in Prescott, Arizona, a small town north of Phoenix. Michelle is the chef. Clarissa manages the business and marketing. I can't cook to save my life, so I married a chef. We came up with a concept for a Eurasian restaurant, which means that we feature European and Asian dishes. You know, him being European, French,

and me being Asian, Filipino. It also made sense that it was a melding of our two cultures. So Eurasia is all about opening minds, broadening tastes, and really embracing cultures. I saw you guys have sea sig, which was exciting. It's very popular. The restaurant was a hit when it first opened in 2017. But over the past few months,

the Cotabarens have struggled financially, in part because of high interest rates. As inflation ramped up, consumers across the country shifted their spending. Instead of dining out so much, they turned to fast food or splurged more at grocery stores. The Cotter Barons say they've seen that trend firsthand. They also saw their customers go to competitors with lower prices. Even the usually busy summer season didn't bring in customers. We spoke to people, locals, that say, you know, and even people that would come here during the summer that that are from Phoenix and they were saying the past

years it was a lot busier we saw in town. It's not as busy. Even the tourists are not coming to Prescott as much as they were before. The slowdown was bad enough. On top of that, their expenses went up because of inflation, like everyone else's. And then, the Cotabarens got hit with a major unforeseen expense. In June, a truck ran into their building and damaged the restaurant's exhaust fans. That meant the restaurant had to shut down until repairs were made, which was a problem

because they were hosting a special event that weekend, and they really needed the business. We were doing a Filipino buffet, and we had 70 reservations, if I remember well, and we had two days to get up and running again. We did the impossible. I took care of finding the two brand new fans which came from California and we pulled it off. In 36 hours later we were up and running again. That was literally an impossible feat. I think the good Lord helped us out there. How did you pay for the replacement and the shipping fee and all of that? Thank you, Visa.

The couple had to pay for the repairs with a credit card, a card that they've relied on more and more for other expenses. Right now, their credit card balance is roughly $60,000. In a bid to survive, the Cotabarrens started a GoFundMe. And they've had to cut employees' hours, picking up the slack themselves, doing the dishes, cleaning up, and working longer hours. How much longer do you think you can go on like this? As long as God wills it.

We're living on week to week now. We are on life support officially. We were both... He's watering up. Excuse me. We're both Catholics. We both believe in God. And we have, you know, really given it up to God to help us.

Michelle and Clarissa hope that with interest rates falling, they'll be able to get a small business loan to consolidate their debt. And they hope that improving financial conditions will bring customers back. But our colleague David says that the economy is more like an ocean liner than a speedboat. A change in course takes time.

Customer habits are slow to change, and higher prices aren't going away. What does all this that we've talked about say to you about the effect that most people will see with the feds rate cut? For most people, this is not going to have a huge impact on your life immediately. If you are about to make a big purchase, if you have been waiting to buy a house or trying to get a mortgage or try to refinance a house at which you have a high mortgage rate, a half point cut might be a big deal to you depending on your financial situation. At the same time, I spent a lot of time talking to low income and poor people across the country and they essentially say it's not just that they have, you know, high housing

costs or high guest lien costs or high credit card fees, et cetera, is that all of those things are happening at once. And that is what is essentially squeezing their finances and really taking a big chunk out of their checkbook every month. The thing is that we're a big country or a big economy. There's a lot of people out there who are trying to buy houses or refinance cars, who have credit card debt. And what the Fed is hoping is that all of those little impacts over the course of time

will add up. They will make people feel a little bit better, they'll make businesses work a little bit better, they'll make the economy function a little better, and hopefully all while doing so as inflation continues to come down. So the hope among all of this is just that the last two years have been very difficult, but they're very close to pulling it off. And the next few months will really determine whether that happens. That's all for today, Friday, September 20th. The Journal is a co-production of Spotify and The Wall Street Journal.

The show is made by Catherine Brewer, Maria Byrne, Jonathan Davis, Pia Gadkari, Rachel Humphries, Ryan Knutson, Matt Kuang, Kate Linebaugh, Annie Minoff, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez Espinosa, Heather Rogers, Pier Singie, Leying Tong, Jeevika Verma, Lisa Wang, Katherine Whalen, Tatiana Zamis, and me, Jessica Mendoza, with help from Trina Menino. Our engineers are Griffin Tanner, Nathan Singapok, and Peter Leonard, with help this week from Sam Baer. Our theme music is by So Wiley. Additional music this week from Katherine Anderson,

Peter Leonard, Bobby Lord, Emma Munger, Nathan Singapok, Griffin Tanner, and Blue Dot Sessions. Fact-checking by Najwa Jamal and Mary Mathis. Thanks for listening. See you on Monday.