Federal Reserve Rate Reduction: What Will Change?

At the annual symposium in Jackson Hole, Wyoming, Federal Reserve Chair Jerome Powell indicated an interest-rate cut is likely at the next meeting to be held in early September. The Fed’s expected decision to cut rates could be a sign that officials feel confident that price pressures are finally coming under control.
A slowing job market is also playing a role in nudging the Fed to ease up on borrowing costs. Powell also expressed confidence in the U.S. economy’s achieving a so-called soft landing—a rare outcome in which inflation is conquered without a serious and sharp rise in unemployment. Such an achievement only happened once, in the mid-1990s.
The Federal Reserve has been maintaining higher interest rates since early 2022. The rates began to rise significantly in March 2022, when the Fed increased the federal funds rate from near zero to combat rising inflation.
Since then, the rates have continued to climb, reaching 5.33 percent as of Aug. 22, 2024. The first rate cut will be a huge deal. Just about every corner of the economy was affected as the Fed raised benchmark interest rates from around zero in early 2022 to 5.25–5.50 percent, the level it’s been since July 2023.
Rates for personal loans, auto loans, and mortgages might also see a reduction, making borrowing slightly cheaper. Lower interest rates reduce the cost of servicing debt, freeing up more money for other expenditures.While the Fed’s rates aren’t the only thing impacting mortgage rates, there is an indirect downward effect. The Federal Reserve makes short-term rate policy, while mortgages are long-term interest rate driven.
By the end of the year, mortgage lenders could be offering average rates below 6 percent on 30-year fixed-rate mortgages, according to Fannie Mae. That would be almost two percentage points lower than the highs reached in 2023.
Lower mortgage rates could help home sales rally in 2024 if buyers come off the sidelines and are drawn back into the market by more affordable financing.
Some online banks have already lowered 12-month CD rates on the expectation that rates fall in the future. High-yield savings account rates can be adjusted at any time, and banks are still advertising some of their highest rates in over a decade. But savers should expect these rates to also be lowered with the Fed rate cuts in 2024.
“Reactionary investment actions are rarely great ones,” says David D’Eredita, founder of Rise Private Wealth Advisor. “Changes to the economic environment really shouldn’t be the catalyst for your investment changes. Changes in your own needs and time horizons should.”