Will Fed Cut Interest Rates Fast Enough09/16 06:35

   American consumers and home buyers, business people and political leaders 
have been waiting for months for what the Federal Reserve is poised to announce 
this week: That it's cutting its key interest rate from a two-decade peak.

   WASHINGTON (AP) -- American consumers and home buyers, business people and 
political leaders have been waiting for months for what the Federal Reserve is 
poised to announce this week: That it's cutting its key interest rate from a 
two-decade peak.

   It's likely to be just the first in a series of rate cuts that should make 
borrowing more affordable now that the Fed has deemed high inflation to be all 
but defeated.

   Consider Kelly Mardis, who owns Marcel Painting in Tempe, Arizona. About a 
quarter of Mardis' business comes from real estate agents who are prepping 
homes for sale or from new home buyers. Customer queries, he recalls, quickly 
dropped almost as soon as the Fed started jacking up interest rates in March 
2022 -- and then kept raising rates through July 2023.

   As the housing market contracted, Mardis had to lay off about half his staff 
of 30. It was the worst dry spell he had experienced in 14 years.

   After the Fed begins cutting rates on Wednesday, Mardis envisions brighter 
times ahead. Typically, a succession of Fed rate cuts leads over time to lower 
borrowing costs for things like mortgages, auto loans, credit cards and 
business loans.

   "I'm 100% sure it would make a difference," Mardis said. "I'm looking 
forward to it."

   At the same time, plenty of uncertainty still surrounds this week's Fed 
meeting.

   How much will the policymakers decide to reduce their benchmark rate, now at 
5.3%? By a traditional quarter-point or by an unusually large half-point?

   Will they keep loosening credit at their subsequent meetings in November and 
December and into 2025? Will lower borrowing costs take effect in time to 
bolster an economy that is still growing at a solid pace but is clearly showing 
cracks?

   Chair Jerome Powell emphasized in a speech last month in Jackson Hole, 
Wyoming, that the Fed is prepared to cut rates to support the job market and 
achieve a notoriously difficult "soft landing." That is when the central bank 
manages to curb inflation without tipping the economy into a steep recession 
and causing unemployment to surge.

   It's not entirely clear that the Fed can pull it off.

   One hopeful sign is that as Powell and other Fed officials have signaled 
that rate cuts are coming, many interest rates have already fallen in 
anticipation. The average 30-year mortgage rate dropped to 6.2% last week -- 
the lowest level in about 18 months and down from a peak of nearly 7.8%, 
according to the mortgage giant Freddie Mac. Other rates, like the yield on the 
five-year Treasury note, which influences auto loan rates, have also tumbled.

   "That really does help lower those borrowing costs across the board," said 
Kathy Bostjancic, chief economist at Nationwide Financial. "That helps to give 
nice relief to consumers."

   Businesses can now borrow at lower rates than they've been able to for the 
past year or so, potentially boosting their investment spending.

   "The question is if it's helping quickly enough ... to actually deliver the 
soft landing that everyone's been hoping for," said Gennadiy Goldberg, head of 
U.S. rates strategy at TD Securities.

   Many economists would like to see the Fed announce a half-point rate cut 
this week, in part because they think the officials should have begun cutting 
rates at their previous meeting in July. Wall Street traders on Friday signaled 
their expectation that the Fed will carry out at least two half-point cuts by 
year's end, according to futures prices.

   Yet Goldberg suggested that there would be downsides to implementing a 
half-point rate cut this week. It might signal to the markets that the Fed's 
policymakers are more worried about the economy than they actually are.

   "Markets could assume that something is wrong and the Fed sees something 
quite terrible on the horizon," Goldberg said.

   It could also raise expectations for additional half-point cuts that the Fed 
might not deliver.

   In the long run, more important than Wednesday's Fed action is the pace of 
rate cuts through next year and the ultimate end point. If Fed officials 
conclude that inflation is essentially defeated and they no longer need to slow 
the economy, that would suggest that their key rate should be at a more 
"neutral" setting, which could be as low as 3%. That would require a series of 
further rate cuts.

   Many economists think the economy needs much lower rates. Diane Swonk, chief 
economist at KPMG, notes that hiring has averaged just 116,000 a month for the 
past three months, a level equivalent to the sluggish job growth coming out of 
the 2008-2009 Great Recession. The unemployment rate has risen by nearly a full 
percentage point to 4.2%.

   "There is a fragility out there when you are not hiring at a very strong 
pace," Swonk said. "This is still a much weaker labor market then we thought we 
had."

   Still, Fed rate cuts may provide a crucial boost to the economy just when 
it's needed.

   Michele Raneri, head of U.S. research at TransUnion, a credit monitoring 
company, noted that lower rates typically lead consumers to refinance high 
interest-rate debt -- principally credit card borrowing -- into lower-cost 
personal loans. Doing so would ease their financial burdens.

   And once mortgage rates fall below 6%, Raneri said, more homeowners will 
likely be willing to sell, rather than holding on to their house out of 
reluctance to swap a low mortgage rate for a much higher one. More home sales 
would help relieve the supply crunch that's made it hard for younger people to 
buy a first home.

   "That starts to break up this logjam that we've been in where there's a low 
inventory of houses," Raneri said. "We need some people to start moving to 
start that churn."

   Other small businesses are seeing signs that the churn is picking up. 
Brittany Hart, who owns a software consulting firm in Phoenix that works with 
mortgage brokers, wealth managers and banks, is noticing more interest from 
potential clients in adopting new software to boost efficiency. That is because 
they expect the housing market to pick up.

   Hart has started looking for three new employees to help handle the expected 
business, to add to the roughly 20 employees she has now.

   "This is the first leading indicator that we are getting back to that normal 
activity in the housing market," she said.