How Borrowers Will Benefit From the Fed’s Interest-Rate Cut
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Here's your money briefing for Thursday, September 19th. I'm J.R.
What was the Fed’s recent interest-rate cut and why does it matter?
Whelan for The Wall Street Journal. Earlier this week, we discussed how you're likely to earn less on your cash as a result of this week's interest rate cut by the Federal Reserve. The news is better if you plan to borrow money for things like credit cards and a house.
There is a thought that cuts in short-term rates will bring mortgage rates down. So definitely we could see more relief on that front. We've already seen a significant amount, and we're starting to see that show up in housing.
Wall Street Journal economics reporter Justin Lehart will join us.
After the break.
Yesterday, the Federal Reserve cut interest rates for the first time in four years. Here's Fed Chair Jerome Powell.
This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%.
The rate cut could also mean some relief for consumers who need to borrow money to manage their finances. Wall Street Journal economics reporter Justin Lehart joins me. Justin, the Fed lowered interest rates by half a percentage point yesterday. What does that mean?
Those are the rates that banks charge each other overnight. But that affects like a whole constellation of what we think of as short-term rates. The most direct way that you see it will be in the prime rate.
How does a Fed rate cut affect short-term rates like the prime rate?
Prime rate is what banks charge. They're sort of the best customers. And there's a bunch of stuff that's attached to the prime rate. So it'll be like prime plus X.
Typically, the Federal Reserve lowers rates when the economy is slowing. What's the Fed's message here?
The economy is not really slowing all that much. We're seeing some cooling in the labor market, but we're still adding jobs. Looks as if in the third quarter, it will continue to be quite good. So- The Fed isn't cutting rates because the economy is falling apart. The Fed is cutting rates because it can, because inflation has come down to the point where they're comfortable cutting rates. Usually, the Fed is racing in with the net. The economy is really showing signs of serious deterioration, or there's been some sort of shock, be it COVID, or the 1998 hedge fund shock that we saw. This is not the case now. So it is a very interesting moment. And that also means that the rate cuts, how they work, may play out a little bit differently than what we've seen in the past.
Let's talk about how those rate cuts will impact the interest rates that consumers pay. What changes are they likely to see in their credit card rates?
Those will just go down in line with what the cut is. So they'll still be quite high, especially relative to what we've seen in the past. So that offers a tiny bit of relief. For people who carry credit card balances, the bigger sort of channel for Fed rate cuts for consumers will be through housing. We've already seen mortgage rates have gone down quite significantly.
And so will the move accelerate that downward movement we've seen in mortgage rates?
It's hard to know, but there is a thought that cuts in short-term rates will bring mortgage rates down. So definitely we could see more relief on that front. We've already seen a significant amount, and we're starting to see that show up in housing. We had a report this week that housing starts and housing permits have started to pick up. We've also seen a pickup in mortgage applications for the purpose of buying a house. And that also is a reflection of this drop that we've seen in mortgage rates.
Why is this rate cut different from past Fed easing cycles?
But what if somebody wants to borrow against the equity they have in their house and do something like take out a home equity line of credit or HELOC?
You suspect that as rates come down, there will be lenders who will be pushing HELOC saying, hey, isn't this a good idea?
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