Will the Fed cut interest rates fast enough to deliver a ‘soft landing’?

American consumers and home buyers, businessmen and political leaders have been waiting for months for what the Federal Reserve is willing to announce this week: That it is lowering its key interest rate from a ten-year peak.

It is likely to be just the first in a series of rate cuts that should make borrowing more affordable now that the Fed has seen high inflation as if it had been defeated.

Consider Kelly Mardis, owner of Marcel Painting in Tempe, Arizona. About a quarter of Mardis’ business comes from real estate agents preparing real estate for sale or new home buyers. Customer inquiries, he recalls, fell sharply as soon as the Fed began raising interest rates in March 2022 — and continued to raise rates in July 2023.

As the housing market tanked, Mardis had to lay off about half of its 30 employees. It was the worst drought he had experienced in 14 years.

After the Fed began cutting rates on Wednesday, Mardis sees bright times ahead. Generally, 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 am 100% sure it will make a difference,” said Mardis. “I’m looking forward to it.

At the same time, a lot of uncertainty still surrounds this week’s Fed meeting.

How far will policy makers decide to lower their default rate, now at 5.3%? With a traditional quarter point or an unusually large point?

Will they continue to release debt at their next meetings in November and December and in 2025? Will the low cost of borrowing work in time to stabilize an economy that is still growing at a steady pace but is clearly showing signs of cracking?

Chairman Jerome Powell emphasized in a speech last month in Jackson Hole, Wyoming, that the Fed is willing to cut rates to support the labor market and achieve the infamous “hard landing.” This is when the central bank is able to curb inflation without putting the economy into a recession that causes unemployment to rise.

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

Another hopeful sign is that since Powell and other Fed officials have signaled that rate cuts are coming, many interest rates have already come down as expected. The average 30-year mortgage fell to 6.2% last week – the lowest rate in about 18 months and down from a high of around 7.8%, according to mortgage giant Freddie Mac. Other rates, such as the yield on the five-year Treasury note, which affects auto loan rates, also fell.

“That really helps lower those borrowing costs across the country,” said Kathy Bostjancic, chief economist at Nationwide Financial. “That helps give good relief to consumers.”

Businesses can now borrow at lower rates than they have been able to in the past year or so, potentially increasing their capital spending.

“The question is if it helps quickly enough … to deliver the soft spot that everyone expected,” said Gennadiy Goldberg, head of US price strategy at TD Securities.

Many economists would like to see the Fed announce a rate cut this week, in part because they think officials should start cutting rates at their next meeting in July. Wall Street traders on Friday indicated they expect the Fed to cut rates by at least two basis points by the end of the year, according to futures prices.

However, Goldberg suggested that there would be issues with applying the cutoff score this week. It may indicate to the markets that Fed policymakers are more concerned about the economy than they are.

“Markets can think something is wrong and the Fed sees something worse,” Goldberg said.

It could also raise expectations for further rate cuts that the Fed may not deliver.

In the long run, more important than Wednesday’s Fed action is the pace of rate cuts next year and the end point. If Fed officials conclude that inflation has been defeated and there is no longer a need to slow the economy, that would suggest that their key rate should be at a “neutral” level, which could be below 3%. That would require a series of further cuts.

Many economists think that the economy needs very low prices. Diane Swonk, chief economist at KPMG, notes that hiring has reached just 116,000 per month in the past three months, a rate that is on par with the slowest job growth since the Great Recession of 2008-2009. The unemployment rate rose by almost full to 4.2%.

“There’s a weakness when you don’t hire at high speed,” Swonk said. “This is still the weakest labor market we thought we had.”

Still, a Fed rate cut could provide a significant boost to the economy just when it’s needed.

Michele Raneri, head of US research at TransUnion, a credit monitoring company, noted that low rates often lead consumers to refinance high-interest loans — especially credit card loans — for low-cost personal loans. Doing so would ease their financial burdens.

And if mortgage rates fall below 6%, Raneri said, many homeowners will be willing to sell, rather than holding on to their homes because of reluctance to change the mortgage rate too low. More home sales could help ease the supply slump that has made it harder for young people to buy a first home.

“That is starting to destroy the situation that we were in when there was a small amount of houses,” said Raneri. “We need other people to start moving to start this trend.”

Some small businesses are seeing signs of growing churn. Brittany Hart, owner of a software consulting firm in Phoenix that works with real estate agents, wealth managers and banks, is seeing more interest from potential clients in acquiring new software to improve efficiency. That’s because they expect the housing market to pick up.

Hart has begun the search for three new employees to help manage the anticipated business, to add to the approximately 20 employees he currently has.

“This is the first leading indicator that we are returning to normal in the housing market,” he said.

– Christopher Rugaber, AP Economics writer