The Federal Reserve cut interest rates by 0.50 percentage points today for the first time in four years. This larger than expected cut will provide some relief to borrowers but may decrease returns for savers.
The Federal Reserve’s 2022-23 hiking cycle will be remembered for the highly unusual series of four consecutive 75 basis points interest rate increases.
The cutting cycle initiated yesterday will be remembered for the highly unusual start of a 50 basis move.
Both will be seen as…— Mohamed A. El-Erian (@elerianm) September 19, 2024
Economists debated the size of the expected cut ahead of the announcement, with predictions ranging from 0.25 to 0.50 percentage points.
Fed Chair Jerome Powell said recent economic data convinced officials that a larger cut was needed.
Pressed by repeated questions during the press conference, Fed Chair Powell had to navigate the contradiction between the unusual step of starting a cutting cycle with a 50 bp cut and the repeated assessment that “the economy is in a good place.”
This got trickier as,…— Mohamed A. El-Erian (@elerianm) September 18, 2024
“Our patient approach has paid dividends — inflation is much closer to our target of a 2% annual rate,” Powell said. The Fed also released economic projections showing a median 2024 federal funds rate of 4.4%, roughly a 1 percentage point reduction from the prior level.
Many economists expect the Fed to continue cutting rates throughout 2025. Mortgage rates, which surged alongside Fed hikes, have already slid in anticipation of a cut. The 30-year fixed-rate mortgage currently sits at about 6.29%, the lowest since February 2023.
Global Central Bank Update:
-The Fed cut rates for the first time since 2020, 50 bps move down to 4.75-5.00%.
-Indonesia cut rates for the first time since 2021, 25 bps move down to 6.00%.https://t.co/l5IYmkeySJ pic.twitter.com/c0hPmgBHZQ— Charlie Bilello (@charliebilello) September 18, 2024
However, the rate cut may not result in a significant drop, especially if the economy remains strong.
Fed action impacts loans, savings
Auto loan and credit card rates are likely to see reductions after the cut.
Experts predict this could nudge holdout car buyers back into a spending mood. Savers have enjoyed high rates on certificates of deposits and high-yield savings accounts during the period of rate hikes. This may change slightly, but there’s still time for people to take advantage of relatively high rates.
Rick Rieder, BlackRock’s global chief investment officer of fixed income, sees a significant shift coming in the market. He believes investors should buy yield and “just watch it do its thing.”
“The idea of, ‘Gosh, I can lock in for three to five years — and you don’t have to go out to 30 years — I can lock in these yields for the next three to five years.’ I think it’s a pretty compelling proposition,” Rieder said. Despite the larger than expected rate cut, the bond market lost ground following the announcement.
Powell’s comments during the press conference, including avoiding declaring victory over inflation, caused the market to reverse course. By the end of the day, mortgage-backed securities were down and the 10-year Treasury yield had risen. The decision and subsequent market reactions underscore the complex dynamics at play in financial markets, particularly in response to Federal Reserve actions.
