Xinhua News Agency/Getty, Tony Cordoza/Getty, Issarawat Tattong/Getty, Tyler Le/BI
The time has finally come: Americans are about to find out how big of an interest-rate cut they'll be getting this week.
On Wednesday, the Federal Open Market Committee will announce its next move on interest rates, and it's all but certain the nation's central bank will cut for the first time in four years. The big question is how much.
On Monday morning, CME FedWatch, which estimates interest-rate changes based on market predictions, said there was a 37% chance the Federal Reserve would cut rates by 25 basis points and a 63% chance it'd be an extra-large 50-basis-point cut. The probabilities suggest a nearly zero chance that the Fed will hold rates steady.
"The time has come for policy to adjust," Fed Chair Jerome Powell said during his address at a gathering of central bankers in Jackson Hole, Wyoming, last month. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
The inflation data from the consumer price index released Wednesday was the last large piece of economic data to come out before the Fed meeting. With August's core CPI coming in hotter than expected, it was looking likely that a 50-basis-point cut wouldn't happen. That's because a larger rate cut makes borrowing cheaper, which tends to drive up spending and fuel prices.
The job market also supports a rate cut this month — the unemployment rate ticked down in August but stayed above its recent lows, and hiring gains have cooled. Lower rates ease pressure on companies' bottom lines, freeing up hiring budgets.
Many economists hope that the long-sought-after soft landing, in which inflation is under control and a devastating recession is avoided, could be near.
"This rate cut is great news for middle-class families, not only does it underscore the Fed is convinced that inflation is coming under control, it signals the economy has recovered to a faster, sustainable growth trajectory and is ready for further investments in job creation," Michael Madowitz, the former director of macroeconomic policy at the Washington Center for Equitable Growth, said in a statement.
Alena McTier, a Gen Zer, has been looking this summer to replace the car she purchased in 2017, but she's up against sticker shock. She said she couldn't wait for the Fed to announce rate cuts. She told Business Insider she was holding on to her car "until a solid decision is made" from the Federal Reserve on interest rates.
"When they are cut, I am going to actively explore the different rates that are available," McTier, who plans to buy a used vehicle, told BI last month.
It could take a while for McTier to see those lower rates. While some parts of the economy will be immediately affected, there will be a lag for relief in some sectors.
"Given the fact that monetary policy does take time to work its way through the system, it'll be the same to some degree with the rate reductions," Mark Hamrick, a senior economic analyst for Bankrate, told BI. He added that prime lending rates would likely be adjusted soon after the decision: "Banks adjust their prime lending rates, the rates reserved for their best customers, and those tend to then be reflected in credit-card rates immediately."
Credit-card interest rates have been at historic highs — a February report from the Consumer Financial Protection Bureau said the average annual percentage rate on credit cards had almost doubled over the past decade to 22.8% in 2023. However, the lag means that those hoping to pay off credit cards won't be materially affected by this month's rate cut — it'll take time for the relief to set in.
Rate cuts will also eventually make it cheaper for small businesses to take out loans. When it comes to buying a new house or car, the rate cuts could make things slightly cheaper, but they likely won't have a significant impact on costs in the short term. That's because rate cuts' effects on the housing market are complicated. A rate cut could cause a rush of buyers to enter the market in the short term, which would drive up prices and competition.
Still, some Americans are shaping their finances in anticipation of a rate cut. In a July NerdWallet survey of Americans, the majority of respondents said they planned to take financial action once interest rates dropped, like buying a home or taking out a loan. Almost one-quarter of US adults in the survey said they planned to buy a car, while 15% said this about a home.
"Regardless of what the Fed decides, if you have credit-card debt, your credit-card debt is going to remain expensive even if interest rates begin to go down a little bit," Sara Rathner, a credit-cards expert at NerdWallet, told BI.
How are you shaping your finances in anticipation of an interest-rate cut? Are you planning to make any big purchases or investments? Share your story with these reporters at asheffey@businessinsider.com and mhoff@businessinsider.com.
