Federal Reserve Chair Jerome Powell stated in a recent “60 Minutes” interview that the Fed would cut interest rates three times this year, noting that nothing had “dramatically” changed since the December Federal Open Market Committee (FOMC) meeting projections.
While the cuts will most likely occur later than the previously anticipated March date, due to both inflation and strong economic data, they will happen at some point. Many Americans have been waiting for this development, as the Fed’s tight monetary policy has, among other things, increased the cost of borrowing.
It is unclear whether these cuts will benefit the middle class, and some experts believe they will have little impact. According to William Luther, Director of the American Institute for Economic Research’s Sound Money Project, inflation has fallen faster than Fed officials expected in recent months.
“As a result, real interest rates have risen higher than the Fed intended. “That makes life difficult for middle-class Americans,” he said. “Small business owners may struggle to fund operations. And if real interest rates stay too high for too long, a recession will eliminate some of the jobs that middle-class Americans rely on to support their families.”
Some nuance.
Matt Colyar, an economist at Moody’s Analytics, believes the Fed will make its first cut in May, followed by three more in the second half of the year.
He noted that lowering interest rates has a nuanced impact on the US middle class. For example, the short-term effects are mostly positive; however, if inflation returns as a result of the Fed’s premature interest rate cuts, the Fed’s job becomes much more difficult, and the solution much more painful.
“The prices of cars, homes, and other items are rapidly rising. “A 20% downpayment, for example, can become unaffordable,” Colyar explained. “Because lower and middle-income households spend a larger share of their income on essentials, saving for a downpayment is more challenging.”
Joe Camberato, CEO of NationalBusinessCapital.com, echoed this sentiment, calling the upcoming cuts “a bit of a mixed bag.”
For example, while high-yield savings accounts (HYSAs) have been very appealing, offering rates of up to 5% compared to an average 0.47% for traditional savings accounts, according to the Federal Deposit Insurance Corporation (FDIC), their rates may fall significantly, eroding Americans’ savings.
“Overall,” Camberato continued, “while it may sting to see potential savings earnings decline, the benefits of lower loan rates can be a win for the middle class. It’s an important trade-off to consider.
Some Positive Middle Class Outcomes
Lower rates, according to Moody’s Colyar, would result in lower borrowing costs not only for large purchases like mortgages and cars, but also for everyday expenses.
“Lower mortgage rates allow potential buyers to afford a larger house. Existing homeowners benefit from an increase in property value. Even if they don’t want to sell, price appreciation means more equity that can be used for other purposes,” he explained.
He did, however, point out that higher-income households are more likely to benefit from this dynamic, and that homeownership is by far the most valuable asset for the majority of Americans.
Fed Chair Powell has admitted several times that high interest rates have weighed down mortgage rates, leaving many potential homeowners on the sidelines.
Michele Raneri, VP and head of U.S. research and consulting at TransUnion, argued that if interest rates fell to even 5.5%, these homeowners could save significantly because refinancing at that rate would result in an average monthly payment of $1,917 — a $284 reduction each month.
“This would represent nearly $300 a month that these homeowners would be able to use elsewhere in this continued high cost-of-living environment in which every dollar counts,” she went on to say.
Credit cards, which have been experiencing record high interest rates, could also provide some relief to middle-class Americans. According to WalletHub, the average credit card interest rate was 22.95% on February 5, 2024, up 0.20% from the previous month.
“Interest rate reductions would decrease card interest rates and could also decrease interest rates for unsecured personal loans and home equity products, allowing many consumers to refinance existing debt,” said Michele Raneri, VP and head of U.S. research and consulting at TransUnion.
What does that mean exactly? “More money in the pockets of middle-class consumers and households at a time many could certainly use it,” he said.
