The US Fed cut interest rates by more than expected. So what?

The bigger-than-expected cut in interest rates by the United States Federal Reserve may have sent the stock market cheering, but its impact on the economy, and the upcoming presidential election, is mixed, experts say.

The US Fed on Wednesday cut the benchmark federal funds rate by half a percentage point to the 4.75 percent to 5 percent range “in light of the progress on inflation and the balance of risks”, the rate-setting committee said in a statement.

The rate had been in the 5.25 percent to 5.5 percent range since July 2023.

Since then, inflation – which hit a 40-year high of 9.1 percent in mid-2022 – has been inching its way down and is now at 2.5 percent, within spitting distance of the Fed’s target of 2 percent.

While the cut was bigger than expected, most US mortgage holders will see no benefit as more than 90 percent of borrowers have fixed-rate loans.

For households with variable-rate mortgages or student loans, relief will take some time, as the terms of repayment typically reset only once every six months or a year.

Some of the biggest beneficiaries of the rate cut will be prospective homebuyers.

The average rate on a 30-year fixed-rate mortgage last week fell to 6.09 percent from a high of nearly 8 percent last October, according to Freddie Mac, fuelled by expectations of lower interest rates.

“The Fed was more aggressive than we expected and that might translate into mortgage rates coming down a bit more as more cuts are due later in the year,” Nancy Vanden Houten, lead economist at Oxford Economics, told Al Jazeera.

Still, while mortgage rates are dropping, “the cut is unlikely to address other drivers of affordability in housing which reflect lower supply, and in fact some asset owners, hoping for lower interest rates to spark investment, may actually raise their expectations of price for those assets”, said Rachel Ziemba, an economist and founder of Ziemba Insights.

On other fronts, interest rates on auto loans and credit card loans are expected to come down.

But since rates are currently above 8 percent for five-year car loans, and more than 21 percent for credit cards, as per Fed data cited by the Reuters news agency, any savings are likely to be modest.

‘Policy uncertainty’

Analysts offered mixed assessments of how the rate cut may affect voter sentiment for the November 5 presidential election.

“This will be a net positive for [Democrat presidential nominee] Kamala Harris,” said Vanden Houten, adding that the rate cut should “guard against any further weakening” of the economy, particularly in the labour market.

“We have already seen a boost in consumer confidence on the expectations of a cut. This is a very close election and polls still show voters give [Republican presidential nominee Donald] Trump an edge on the economy, but this still helps Vice President Harris,” she said.

Ziemba was not so sure.

While the economic effects of the cut will not be fully apparent for months, the candidates are likely to put different spins on the Fed’s decision in the lead-up to the election, Ziemba said.

“The Democrats may point to the Fed’s signal that the economy is doing OK, the Republicans may claim that the Fed is trying to play catchup and benefit their rivals. Ultimately, other perceptions of economic policy will likely be more important, including food and fuel prices, as well as other costs like rising health insurance which won’t be reduced by rate cuts,” she said.

Ziemba said the “policy uncertainty” raised by the election outcome, including the prospect of sweeping tariffs under a second Trump presidency, may overshadow the impact of any decisions by the Fed.

“The uncertainty about fiscal and trade policy can undermine benefits from lower interest rates,” Ziemba said.