On Wednesday, the Federal Reserve cut its key interest rate by half a percentage point. This immediately puts the interest rate between 4.75 and 5 percent. The Fed also announced that further interest rate cuts are likely before the end of the year.
This combination suggests that the Fed is taking the threat of a slowdown in the American economy seriously. It is high time – in fact, it is long overdue.
Many Americans are becoming increasingly selective about their spending.
Yes, at first glance the US economy appears to be doing “basically well,” as Powell put it in his press conference today. The stock market is booming, and retail sales and consumer confidence remain stable. But beneath the surface, signs of problems are mounting.
Credit card debt has risen over the past year. So have credit card delinquencies, which are now at their highest level since the 2008 financial crisis. Auto loan delinquencies have also risen. Unemployment, while still relatively low (4.2%), is almost half a percentage point higher than a year ago. Wage growth is slowing and the labor market is stagnating, especially for white-collar workers.
As a result, while many Americans aren’t completely abandoning the YOLO attitude of recent years, they are becoming increasingly picky about their spending. While overall retail sales are slowly rising, restaurant sales are stagnating and the post-pandemic travel boom is fading as hotels report lower demand from vacationers. Aside from Taylor Swift, musicians are struggling to draw crowds. Even Jennifer Lopez canceled a planned tour this summer amid falling sales. Other artists, particularly in the nostalgia space, joined forces and offered audiences two-for-one deals, apparently to increase the likelihood that they could fill seats. (Elvis Costello and Daryl Hall toured together this spring and summer. So did Rick Springfield and Richard Marx.)
That this would happen has been clear for some time — the last of the pandemic savings were depleted in March — but the Fed blithely prioritized its fight against inflation even as it became increasingly clear that the battle against pandemic-era price increases and profiteering was all but won. Last month’s consumer price index, at an annual rate of 2.6%, was just a tad higher than pre-pandemic levels. Gasoline averages about $3.20 a gallon nationally, 50 cents less than in April, and some experts believe the national average could fall below $3. Major retailers like Walmart and Target have slashed prices on thousands of items so much that they’re putting pressure on traditionally lower-priced dollar stores.
The Biden administration has already taken action to crack down on corporate price gouging, and Vice President Kamala Harris says she will continue those efforts if elected. Last month, the Justice Department sued software company RealPage, arguing that its rental management software provides landlords with a back door to collude on rent prices.
This is not an attempt to rig the election. It is something that should have happened months ago.
The inflation that’s hurting American families the most right now is high interest rates — and the Fed’s rate cut can make a difference. Credit card debt currently carries an average interest rate well over 20%, while store-brand credit cards are at a record high with an average annual interest rate of 30.45%, according to a recent study from Bankrate. The Fed’s move on Wednesday should cause those horrendous rates to come down.
The same is true for housing costs: While the mortgage rate is most closely tied to the 10-year Treasury yield — which is already falling as inflation eases — that number is often influenced by the federal funds rate as well. The new cut will almost certainly make it easier for millions of Americans to find a new home.
Donald Trump and some of his Republican supporters will most likely argue that this was a policy decision by the Fed. Trump has said in the past that he thinks interest rates are too high, but that making a decision so close to the presidential election is “something they shouldn’t be doing.”
Please. This is not an attempt to rig the election. It is something that should have been done months ago. Powell acknowledged as much, saying Fed officials “may have made the rate cuts sooner” if they had had the economic knowledge they have now over the summer.
And as for Trump, remember: he only has one thing on his mind – himself. That’s why he complains both that interest rates should be lowered and that inflation is higher than ever before in U.S. history (as someone who lived through the 1970s, he should know that’s a lie). The only purpose of this incoherent position is to argue for his election.
Since 1977, the Federal Reserve has had a dual mandate: to balance and maximize price stability through maximum employment. Now it is active in both areas again – and it is high time.
