WSJ Your Money Briefing - How Borrowers Will Benefit From the Fed’s Interest-Rate Cut

Episode Date: September 19, 2024

The Federal Reserve cut interest rates by half a percentage point yesterday, the first reduction since 2020. Wall Street Journal economics reporter Justin Lahart joins host J.R. Whalen to discuss how it’s likely to affect credit-card account holders and prospective home buyers. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Ecolab Water for Climate. Less water, more growth. Results will vary. Learn more at Ecolab.com slash EWC. Ecolab Water for Climate. Transforming the way the world thinks about water. Here's your money briefing for Thursday, September 19th. I'm JR Whalen for The Wall Street Journal. Earlier this week we discussed how you're likely to earn less on your cash as a result of this week's interest rate cut by the Federal Reserve. The news is better if you plan to borrow money for things like credit cards and a house. There is a thought that cuts in short-term rates will bring mortgage rates down. So definitely we could see more relief on that front. We've already seen a significant amount

and we're starting to see that show up in housing. Wall Street Journal economics reporter Justin Layhart will join us 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. I'm there for zero dollar delivery fee on cheeseburgers, up to five percent off smoothies and five percent Uber cash back on rides. Just to be clear, I'm there for savings, not whatever you think university is for. Get Uber One for students, a membership to save on Uber and Uber Eats.

With deals this good, everyone wants to be a student. Join for just $4.99 a month. Yesterday, the Federal Reserve cut interest rates for the first time in four years. Here's Fed Chair Jerome Powell. 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 percent. The rate cut could also mean some relief for consumers who need to borrow money to manage their finances. Wall Street Journal economics reporter Justin Layhart joins me. Justin, the Fed lowered interest rates by half a percentage point yesterday. What does that mean? Those are the rates that banks charge each other overnight, but that affects like a whole constellation of what we think of as short-term rates.

The most direct way that you see it will be in the prime rate. Prime rate is what banks charge. They're sort of the best customers and there's a bunch of stuff that's attached to the prime rate so it'll be like prime plus X. Typically the Federal Reserve lowers rates when the economy is slowing. What's the Fed's message here? The economy is not really Slowing all that much. We're seeing some cooling in the labor market But we're still adding jobs looks as if in the third quarter. It will continue to be quite good So the Fed isn't cutting rates because the economy is falling apart

the Fed is cutting rates because it can, because inflation has come down to the point where they're comfortable cutting rates. Usually the Fed is racing in with the net. The economy is really showing signs of serious deterioration or there's been some sort of shock, be it COVID or the 1998 hedge fund shock that we saw. This is not the case now. So it is a very interesting moment. And that also means that the rate cuts, how they work,

may play out a little bit differently than what we've seen in the past. Let's talk about how those rate cuts will impact the interest rates that consumers pay. What changes are they likely to see in their credit card rates? Those will just go down in line with what the cut is. So those will be quite high, especially relative to what we've seen in the past.

So that offers a tiny bit of relief. For people who carry credit card balances, the bigger sort of channel for fed rate cuts for consumers will be through housing. We've already seen mortgage rates have gone down quite significantly. And so will the move accelerate that downward movement we've seen in mortgage rates?

It's hard to know, but there is a thought that cuts in short-term rates will bring mortgage rates down. So definitely we could see more relief on that front. We've already seen a significant amount and we're starting to see that show up in housing. We had a report this week that housing starts and housing permits have started to pick up. We've also seen a pickup in mortgage applications for the purpose of buying a house. And that also is a reflection of this drop that we've seen in mortgage rates.

But what if somebody wants to borrow against the equity they have in their house and do something like take out a home equity line of credit or HELOC? You suspect that as rates come down, there will be lenders who will be pushing HELOC saying, hey, isn't this a good idea? And for a lot of people, if they're stuck in their home,

they have a really low mortgage rate, they don't want to move, all right, the alternative is put in a new deck, make it a little bit nicer. So we might see some of that. What changes are small business owners likely to see? Small business owners, unlike big businesses, they can't tap the bond market.

So small business loans are sort of more affected by Fed rates. Small businesses also, a lot of them use credit cards to finance a lot of their activity. So this slight drop that we'll see in those credit card rates, it's gonna help. They'll also be maybe better able to finance a purchase. They want to get new cash registers in or, you know, buy a new grill, something like that. This week's rate cut was the first since the Fed raised them 11 times going back to 2022. Does that mean that we should look at the potential benefits from this week's cut as just a snapshot? In some respects, we're still living with those rate increases.

It takes a long time for rates to move through the economy. It takes longer to sort of affect things like business spending and so forth. So it'll take time. The Fed has signaled that it is going to keep on cutting rates. So they expect to cut rates through the end of this year, into next year.

What's the timetable for the Fed through the rest of the year? The Fed will meet again in early November. They've signaled that they're going to cut rates by a quarter point then, with a last meeting in December. And that is also expected to show a quarter point cut. That's WSJ reporter Justin Layhart. And that's it for your money briefing.

We'll be back tomorrow with WSJ's Veronica Dagger to discuss what the interest rate cut means if you're thinking of refinancing your mortgage. This episode was produced by Zoe Culkin and Ariana Asparu with supervising producer Melanie Roy. I'm JR Whalen for The Wall Street Journal. Thanks for listening.