Aggressive rate cut as inflation has dropped

The Federal Reserve’s announcement that it was cutting its federal funds rate, which will lead to similar drops in other key interest rates across the country, represents an aggressive move by the nation’s central bank to stimulate economic activity. It also symbolizes less worry about inflation; the Fed had raised rates since 2022 to fight rising inflation in the United States, and the inflation rate has since fallen closer to the Fed’s goal of 2%.

Fed Chair Jay Powell explained, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation.”

The size of the cut, half a point instead of a more standard quarter, shows the Fed’s changed priorities, and Fed watchers expect additional cuts to follow before the end of the year.

What is the impact of the fed rate cut on Americans?

The Fed’s shifting priorities come as inflation rates drop to 2.5% while unemployment numbers have risen to 4.2%. A recent revision in job creation statistics shows that the United States has created fewer new jobs over the past year than previously estimated. In practical terms, the impact of the Fed rate cut should be to stimulate job creation, which will bring down unemployment numbers. The cut should also lower credit card rates and bring mortgage rates down; auto loan rates are also likely to drop. The reduced rates will cut into the yields that savers enjoy. While experts don’t recommend significant changes to savings practices, they suggest that shifting to high-yield savings accounts could help mitigate the impact of the rate cut.

Political impact as Election Day nears

Although various factors will decide the 2024 presidential election, the drop in interest rates is generally seen as a benefit for Vice President Kamala Harris against former President Donald Trump. Republican candidates tend to be seen more favorably on economic issues than Democrats. Trump has spent much of the election cycle attacking Harris and President Joe Biden on inflation, job growth and other measures of economic health. By signaling that inflation is under control and potentially stimulating job growth, the Fed cut will deliver Harris a more rosy economic picture to present to voters. Anticipating this move, Trump has previously claimed — without evidence — that any rate cut before the November election would be politically motivated.

With the presidential election less than 50 days away, we will soon find out whether this week’s rate cut will significantly impact voters’ choice in November. Beyond that, borrowers and job-seekers have reason to believe that their prospects will improve as the Fed shifts its policies.