The Fed’s Interest Rate Cut (September 2024): Is It Helping?

The Federal Reserve building in Washington, DC, illustrates the Fed's interest rate cut (September 2024)

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Why did the Fed cut interest rates in September? When can borrowers expect to see meaningful relief in their monthly payments?

The Fed’s interest rate cut (September 2024) marked a significant shift in Federal Reserve policy, coming after years of aggressive rate hikes to fight inflation. While this reduction signals progress in the battle against rising prices, many Americans still face financial challenges from lingering inflation effects.

Keep reading to learn how interest rate cuts in September 2024 and beyond could affect your financial future, from mortgage payments to car loans.

Image credit: Dan Smith Rdsmith4, CC BY-SA 2.5, via Wikimedia Commons (License)

The Fed’s Interest Rate Cut (September 2024)

The Federal Reserve’s interest rate cut (September 2024) came amid signs of cooling inflation. After over two years of rate hikes, the Fed decided to cut rates by 0.5 percentage points to combat rising prices. Prices are now increasing at an annual rate of 2.4%, far lower than the 40-year high of 9.1% in June 2022.

Yet, the damage from years of high inflation lingers. Since early 2021, prices have climbed nearly 19%. The ongoing impact is clear in consumer spending, which has grown just 1.7%—failing to keep pace with even the current, lowered inflation rate.

The interest rate cut was supposed to help Americans’ finances. Instead, many still find themselves deep in debt, priced out of housing, and increasingly anxious about their future. While further interest rate cuts are anticipated, persistent economic challenges suggest that Americans may need to adjust their expectations and adapt to a new financial normal.

A Quick History of US Interest Rate Strategies

In his book 21st Century Monetary Policy, former Fed Chair Ben S. Bernanke explains that the Federal Reserve’s interest rate strategies have evolved significantly since World War II, as demonstrated through the tenures of various Fed chairs. From William McChesney Martin Jr.’s establishment of economic stability practices in the 1950s to Jay Powell’s management of the COVID-19 crisis, the Fed has continuously adapted its approach to meet changing economic challenges. The institution has moved beyond traditional interest rate management to embrace more sophisticated tools, including quantitative easing and forward guidance, while emphasizing greater transparency in its communications.

The Fed now employs a diverse toolkit to address modern challenges such as declining neutral interest rates and zero lower bound limitations. These tools, combined with enhanced communication strategies and state-contingent guidance, help the Fed manage inflation expectations, maintain independence, and respond to unprecedented economic conditions. This evolution reflects the Fed’s ongoing commitment to economic stability while demonstrating its ability to adapt to an ever-changing global financial landscape.

Why Interest Rate Cuts Aren’t Helping Yet

The September 2024 interest rate cut hasn’t brought the relief many Americans expected for two key reasons:

First, it takes time for Fed rate cuts to work their way through the economy and reach consumers through lower borrowing costs on mortgages, car loans, and credit cards.
Second, despite the Fed’s cut, mortgage rates have increased by 0.4 percentage points. This surprising trend reflects a stronger-than-expected economy, leading lenders to keep rates high as they anticipate fewer cuts ahead.

The Keynesian Perspective on Interest Rates

In his book The General Theory of Employment, Interest, and Money, economist John Maynard Keynes shares his views on interest rates and their relationship with economic behavior. While lower interest rates traditionally encourage borrowing and discourage saving, Keynes argues that this relationship is more complex than commonly believed. He challenges several conventional economic theories:He disputes that interest rates are the main driver of economic cycles, noting that factors such as confidence levels can override interest rate effects.

Keynes rejects the traditional view that interest rates simply balance saving and investment, arguing that aggregate income and consumption habits play more significant roles.He proposes that interest rates are primarily influenced by liquidity preferences—people’s desire to keep assets easily convertible to cash, especially during uncertain times.He emphasizes that economic uncertainty significantly affects financial decision-making, with people demanding higher interest rates to part with liquid assets during volatile periods.Overall, Keynes presents a more nuanced view of how interest rates interact with economic behavior, highlighting the importance of psychological factors and uncertainty in economic decision-making.

Future Interest Rate Cuts

The Federal Reserve anticipates additional rate cuts through 2026, suggesting eventual relief for borrowers. While mortgage rates dropped to 6.2% in September, most homeowners with 5% mortgages still need to see rates fall further before they’ll refinance. Auto loan rates—now 7.1% for new and 11.3% for used vehicles—may decline slowly, benefiting those with strong credit scores.

Yet significant risks remain. Key bond market measures suggest inflation could rise again despite the Fed’s efforts, and officials warn against declaring victory too soon. Some economists caution that continued rate cuts could fuel inflation by encouraging more borrowing and spending. This tension between providing consumer relief and maintaining price stability suggests Americans may need to adjust to a new normal rather than expecting a quick return to pre-pandemic conditions.

The Fed’s Interest Rate Cut (September 2024): Is It Helping?