Inflation is normalizing, but will not mean a new interest rate cut

After inflation peaked in early 2022, the Federal Reserve repeatedly stated that its goal with aggressive rate hikes was to reduce inflation to a 2% annual target range. Well, it’s almost time.

Today Consumer price indexwhich measures the cost of food, housing, gas, utilities and other goods in the month of September, shows annual price growth of 2.4%. While that’s slightly higher than what markets expected, it’s still the slowest pace since early 2021. The core CPI, which excludes volatile food and energy costs, rose 3.3%, also just above expectations.

The big question is how this figure will influence the Fed’s actions at its next monetary policy meeting on November 6-7. The Fed cut rates by 0.5% on September 18, which we believe would be the first step in lowering borrowing costs.

But market watchers do not expect another major interest rate cut next month. Some even say that the Fed won’t lower rates at all.

The Fed’s two main objectives are to maintain maximum employment and to curb inflation. Even as prices for goods and services are no longer at record highs, the economy is sending mixed warm-cold signals.

The most recent employment report The Bureau of Labor Statistics found that the U.S. workforce exploded beyond expectations in September. Instead of higher unemployment rates, the unemployment rate fell slightly. The outlook now appears to be a reversal from August economic data, which stoked fears of a recession and prompted the Fed’s bigger-than-expected rate cut.

“While the Fed remains vigilant on inflation, the labor market has come to the fore. The Fed does not want the labor market to go from weak to spoiled,” he said Charles Doughterysenior economist at Wells Fargo.

Experts agree that the Fed can and should continue to cut rates. But since the labor market isn’t going off a cliff, it doesn’t have to happen at breakneck speed. In other words, there is no longer any urgency for aggressive cuts.

A shallow 0.25% interest rate cut at the next meeting could ensure inflation continues to fall and a recession with job losses can be avoided, allowing the economy to find a “soft landing”, they said Beth Ann Bovinochief economist at US Bank. “Since landings are often the riskiest part of any flight, the Fed will need to be alert to any looming concerns,” Bovino said.

Although unemployment is still historically low, it has risen steadily from last year, and the Fed should not risk it rising further. At the same time, Bovino noted that “it is becoming more difficult for many households (particularly low-income households) to continue paying higher prices for groceries, utilities and housing.”

What smaller Fed rate cuts mean for your money

The Fed’s interest rate cuts have a double impact on your wallet. Interest rate cuts affect the cost of borrowing money, both with a loan and with a credit card. They also determine how much you earn from the money you put into a high-yield savings account or certificate of deposit.

Now that the Fed is lowering interest rates, you have to pay less to borrow money. You will also see a smaller return on your savings.

However, the Fed is not cutting rates all at once. Over the next eighteen months, the Fed will adjust interest rates gradually, probably by 0.25% each time. And it will take some time for these policy changes to filter through to the economy.

According to Bovino, the magnitude of one rate cut, whether 0.25% or 0.5%, will not be felt by most U.S. consumers in the near term. Financial institutions often quickly increase the cost of loans but reduce them slowly to maximize profits.

“As credit cards respond more slowly to Fed policy than mortgage rates, households, especially low-income households, which increasingly rely on credit cards to cover their costs, will continue to face near-term pressure on of affordability,” said Bovino.

The Fed does not directly set mortgage rates, but its policy adjustments and economic outlook influence interest rate movements. For example, although home loan rates fell sharply this summer in anticipation of a rate cut, they have already gone back up. Smaller interest rate cuts mean that mortgage rates may not see a significant decline in the short term.

For savers, many banks have already reduced their annual returns on savings and CDs. Since the Fed is expected to take its time cutting rates, you can expect better-than-average returns on your deposits for a few more months.

Overall, lower inflation and interest rate cuts provide some breathing space in household budgets.