What does a Fed rate cut mean for American households?

The Federal Reserve has cut US short-term borrowing costs by a bigger-than-usual half percentage point, a watershed moment that should start to ease some of the financial pressures everyday consumers have felt over the two and a half years that the central bank has battled with high inflation.

The Fed, after 5.25 percentage points of increases between March 2022 and July 2023, lowered its key rate to 4.75 percent-5.00 percent to address rising worries about the cooling labour market.

Financial markets are now pricing in the central bank to keep lowering rates to around 4.00 percent-4.25percent by the end of the year, with more cuts in 2025.

So how will rate cuts affect ordinary people?

Softening the landing

The Fed's aggressive rate hikes, begun only after inflation had surged, were initially expected to cause an economic slowdown resulting in job losses.

Instead, the economy so far has averted recession, even as inflation by the Consumer Price Index dropped.

In cutting rates, the Fed is trying to keep it like that. Already, hiring and wage growth have slowed, the number of job openings per worker has dropped, job search times are lengthening, and the number of workers settling for part-time work when they prefer full-time employment has risen.

Lower interest rates are aimed at easing those trends by making it less expensive for businesses and households to borrow and therefore spend more freely.

Whether the Fed can calibrate its rate cuts so as to achieve what economists call a soft landing - the policy coup of guiding an economy through a period of tight monetary policy to stifle inflation without jarring the labor market - will be one of the most important ways its actions will affect regular Americans.

Cost of credit

Borrowing costs — rates on home loans, credit cards, auto loans and student loans — rose sharply as the Fed increased its policy rate.

Some of those rates, notably mortgages, have fallen quite a bit as the Fed has telegraphed its intentions for rate cuts: The average 30-year fixed rate mortgage recently fell to 6.20 percent, according to Freddie Mac, from a high of nearly 8 percent last October.

As for student loans, if the loan is from the federal government it won't move at all. Rates on loans from private lenders will.

Savings and investments

As the Fed raised its benchmark rate, banks raised rates on high-yield savings accounts and certificates of deposits, with some banks crowing to savers about each increase.

As the Fed has signaled rate cuts, those same banks have quietly lowered their rates as well, and likely will drop them further once the Fed actually moves. For savers, that will be a negative.

Over the longer run, lower interest rates tend to push up the stock market as a whole as investors are enticed to take on more risk when yields on safe assets like government bonds fall.

About 58 percent of American households in 2022 had money in the stock market, according to Fed research.

Housing affordability

While mortgage rates have dropped in the wake of the Fed's rate cuts, housing affordability remains at levels comparable to those seen during the housing bubble that preceded the 2007-2009 financial crisis, national data from the Atlanta Fed shows.

A Fed interest rate cut will do little to change that in the short-term, Fed policymakers have said. Eventually, lower borrowing costs should filter through to the housing market, encouraging builders to add supply and homeowners who locked in low mortgage rates years ago to consider selling.

"The dynamic between interest rates and home prices is very different in this business cycle post pandemic and the reason is we lack housing supply, both single and multi-family," says Nationwide's Kathy Bostjancic.

"But one way you get increased supply in the market is having mortgage rates going down...in some areas you may actually see a little bit of a decrease in home prices because of increased availability."