Interest rate cut to have varying trickle down effects on borrowing costs locally
By Cameron Montemayor
The Federal Reserve’s decision last week to slash interest rates for the first time in four years may have some wondering when the move will start to have a noticeable impact on borrowing costs locally.
Jason Satchell, a business and finance professor at Northwest Missouri State University with a master’s degree in science finance from Creighton University, said many economists had predicted a smaller rate cut of .25 points before ultimately settling on a larger half-point cut.
Despite the Fed’s move, the impact on consumers, businesses and borrowing costs is expected to be minimal with this first cut. Additional cuts later this year are likely to result in more noticeable impacts.
“You did see an immediate drop in some of the rates that you’re going to see, whether that’s your interest rate on your credit card,” he said. “GDP just came in today, 3% annualized GDP growth. So the economy, by most metrics that we go ahead engage on, is doing really well.”
Freddie Mac data released on Thursday showed that the average rate on the benchmark 30-year fixed mortgage hit the lowest level in two years to 6.15%. The average rate on a 30-year loan was 7.31% a year ago.
On the other hand, the average credit card interest rate in America stood at nearly 25%, according to LendingTree, tied with the highest rate since it began tracking average rates in 2019. American Express and U.S. Bank have lowered APRs on several credit cards on their websites by 0.50 percentage points.
“I think once we get probably closer to that, you know, maybe 4% mark for home loans, 4 1/2%, I think you could really start to see an uptick in sales,” Satchell said. “As far as your credit cards and other other products, I mean, that’s a little bit more instantaneous because most credit card and banks are going to use a prime rate.”
With challenges in the housing market and prices for many grocery products still significantly higher than average, he knows despite the Fed’s cuts that costs are still weighing on Americans who have already had to be extremely resilient over the last few years.
Trying to forecast when high prices will ease for certain grocery products like beef, which is impacted by other variables like supply-chain and demand challenges, is a challenge in and of itself.
The Fed is widely expected to make additional interest rates cuts — potentially later this year — after signaling its support for a gradual easing of rates.
“So we’re going to hopefully see moderate, small decreases in that rate over time and not a jumbo size rate cut like we saw this last time,” he said.
A boost in spending habits by U.S. consumers as a result of the latest interest rate cut could spur economic activity, but the impact on businesses and their decision to pursue projects is another key area to watch.
“When you go ahead and you look at how businesses decide on their if they’re going to make expansion projects or if they’re going to hold tight, the rate that they’re able to acquire in the marketplace is extremely important,” he said. “Once you get one or two percentage points, that can make a huge difference on whether a project’s profitable or not.”
