by Jade Thomason
Vice President Equity and Fixed Income Trading
For the first time in nine months, the Federal Reserve approved a quarter-point interest rate cut on Wednesday, bringing the Fed funds target range between 4.0 and 4.25%. The rate cut was widely expected, resulting in minimal market reaction after the announcement—unsurprising, given the strong rally in stocks and bonds leading up to this week. News of rate cuts has dominated the headlines, and now that they've finally occurred, it's time to consider what their true implications are for the economy and the consumer.
The interest rate cut is important, but even more revealing are the comments made by Fed Chair Jerome Powell during the news conference. The Federal Reserve’s dual mandate requires it to conduct monetary policy to achieve both maximum employment and stable prices. Inflation has been the focus of this mandate, but recently, jobs data showed the unemployment rate drift up to 4.3% and hiring continue its downward trend. Powell noted the recent declines in the growth rate for both the number of people looking for jobs and those gaining employment have “certainly gotten everyone’s attention.” In addition to these remarks at the conference, the post-meeting statement no longer described the labor market as “solid”, and noted the cut was justified “in light of the shift in the balance of risks.” A slight majority of the Governors also expect two more rate cuts this year.
A rate cut is welcome news for the consumer as this indicates lower borrowing rates – relief to consumers with credit card balances and small businesses with variable-rate debt. Chatter of mortgage rates is always synonymous with rate cut headlines, but mortgages aren’t priced off the Fed’s short-term interest-rate target. Many prospective homebuyers remain sidelined due to high prices and high borrowing costs, and unfortunately, these cuts will not cause mortgage rates to fall fast. The key benchmark for mortgages is the yield on a 10-year U.S. Treasury, since that is about the expected amount of time a homeowner might hold that 30-year mortgage before moving or refinancing. Unfortunately, the 10-year treasury actually increased after the cut from 4.04% to 4.1%.
Despite the unwelcome news regarding mortgage rates, consumers are not showing signs of stress. While credit card debt is at all-time highs, consumers are able to “manage” this debt.
The graph above shows the debt service ratio which is defined as the monthly debt payments divided by the monthly income. While on the rise since 2021, the current level remains low compared to long term averages. Consumers are also continuing to spend as evidenced by the August retail sales – which rose 0.6% from July and was higher than the 0.3% increase that economists expected. This increase was driven mainly by the back-to-school categories including clothing, accessories and sporting goods. This resilience in spending and debt management suggests that the consumer remains a steady pillar of strength in the broader economy.
Takeaways for the Week
The Federal Reserve approved a quarter-point interest rate cut on Wednesday, bringing the Fed funds target range between 4.0 and 4.25%.
The S&P 500, Nasdaq, and Dow industrials all closed at record highs this week.