The Federal Reserve cut its key interest rate by a quarter percent on Wednesday, in an attempt to prop up the U.S. economy in the face of global uncertainty.
The Fed’s reduction of the federal funds rate is only one of many factors that affect the U.S. economy, but it can still trigger shifts that trickle down into Americans’ finances.
How the rate cut affects each American depends largely on each American’s circumstances.
“If you’re thinking of buying a house, refinancing, buying a car, this is better news for you than if you are a retiree that is relying on the return on savings,” said Carmen Reinhart, an international finance professor at Harvard University.
Spending versus saving
Consumer spending has been strong in recent months, although it did dip slightly in August.
Lowering the federal funds rate could indirectly lower credit card interest rates, which might encourage more people to spend money.
The rate cut could also reduce the interest rates that banks pay out for savings accounts, which are already on average less than 3 percent, encourages Americans to save less and spend more.
For older Americans who rely more on savings, the interest rate will mean they will have slightly less payout from their accounts, although some banks offer higher rates than others.
Mortgage rates are not directly affected by the Federal Reserve rate cut, but they do tend to rise and fall with other interest rates.
Like the stock market, mortgage rates are forward-looking, which is why, over the past few months, they dropped to near-record lows in anticipation of the Fed’s rate cut. Because rates were reduced before the rate cut was announced, financial experts don’t expect mortgage rates to drop much more.
The existing low mortgage rates are starting to encourage more people to apply for mortgages, but the effects on home sales will not be immediate.
“Homebuying is not a snap decision. It takes time for people to process,” said Lawrence Yun, the chief economist at the National Association of Realtors.
What could push mortgage rates down further is if investors think the Federal Reserve is likely to drop interest rates again before the end of the year. The Federal Reserve has not indicated whether it plans another rate cut. Instead, it said it would “continue to monitor” the economic outlook and “act as appropriate” to sustain an economic expansion.
Even though unemployment remains at historic lows, signs have been pointing to a hiring slowdown.
Experts say that employers are having trouble finding qualified workers, for example, but have also been hesitant to hire less qualified workers and pay to train them. Manufacturing has also slowed amid the U.S.-China trade war.
By lowering the federal funds rate, the Federal Reserve is making money easier to borrow. That could help boost business spending, which could improve hiring and increase wages, but it won’t fix underlying problems.
In other words, “an interest rate cut should prevent things from getting worse, but there are other things that are weighing more on the labor market,” said Dan North, chief economist at Euler Hermes North America.
What the Fed can’t control
The Federal Reserve can only respond to uncertainty in the global economy, it cannot fix it. And right now there is a lot of uncertainty.
“The thing we can’t address really is what businesses would like, which is a settled roadmap for international trade,” Powell said at a news conference Wednesday.
He added that what the Federal Reserve is trying to do is implement sound monetary policy that can help offset some of the uncertainty and encourage investment.