On September 18, 2024, the Federal Reserve [Fed] cut the Federal Fund Rate by 0.50 percentage points. This is the first rate cut since the Fed began raising interest rates in March 2022. Most economists were surprised by the aggressive rate cut, which was double the typical 0.25 percentage point cut. Fed chairman, Jerome Powell, stated that the reason for the aggressive rate cut was because, “The U.S. economy is in a good place…and our decision today is designed to keep it there.”

Here are a few takeaways we can reflect on regarding this decision by the Fed. 

First and foremost, Powell’s statement that the U.S. economy is in a good place is controversial. Most Americans would not agree with this statement. Basic living costs such as groceries, gasoline, housing prices, rent, etc, are still very high. The majority of Americans are living paycheck to paycheck just to survive and often cannot afford simple luxuries such as eating out at restaurants or going to the movies. While the Fed rate cut could help improve mortgage interest rates, most people still cannot afford to buy a new or used house due to the still inflated prices of homes. The Federal Fund Rate is just one factor of many that affect the housing market. There are many issues beyond the Fed’s control that impact the housing market, such as lack of supply. Lack of supply and greater demand just causes the price of homes to remain high. So the Fed’s decision to aggressively cut the rate by .5 percentage point in order to keep the economy where it is today, may not have been the best decision for most Americans. 

The Federal Reserve's decision to cut this month was also influenced by data from the labor market. In July, the Labor Department issued a data revision showing that the U.S. actually added 818,000 fewer jobs from March 2023-March 2024, than originally reported.  What this means is that the U.S. job market was not as strong as it originally appeared. This sparked concerns the U.S. economy could be cracking under the highest interest rates in 23 years. Nationwide senior economist Ben Ayers  was predicting a rate cut of 0.25 percentage points. He stated,"Calls for a larger, 50 bps decline will become louder if the August jobs report comes in weaker than expected and there are more signs of businesses retrenching,"  The 0.5 percentage point drop further confirms that the U.S. economy may not be currently in a “good place” as Powell suggests. 

Powell has repeatedly stated that he and his colleagues are not swayed by partisan politics. However, the timing of the Fed's move is politically sensitive. This rate cut comes less than seven weeks before a presidential election. The strength of the economy is always a key issue for voters. If the economy is strong, Americans usually like to keep things status quo. If the economy is not doing well, Americans tend to vote for a change in the system. Avoiding a recession at all costs seems to be a motivating factor for the Fed’s aggressive rate cut, especially coming into an election season. 

While falling interest rates may help borrowers and potentially spur economic growth; it comes with a cost for savers. The minimal interest currently paid for online savings accounts and money market funds will likely decline. This means less money for those who are attempting to put something aside for that rainy day. 

The Fed’s rate cut also does not affect the high costs of wages for Employers. While the Federal minimum wage rate is currently $7.25/ hr, only 13 out of the 50 states have their minimum wage set at that rate.  The majority of U.S. employers are paying anywhere from $10/ hr. - $17/ hr. for employee  MINIMUM wage in addition to the employer taxes and benefits that the employer pays for each employee. Most Americans will not work for, nor can they survive on minimum wage due to the high cost of living. This leaves the employer with the dilemma of having to offer an hourly rate much higher than minimum wage just to get an employee to show up for work. This increases the employer’s costs which in turn requires him to pass his increased costs onto the consumer, leaving consumer prices at an all time high. 

Whether this aggressive rate cut by the Fed will actually spur the economy to a better place or send it into a severe recession is yet to be determined. I guess time will tell as we watch and wait. 

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