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The Federal Reserve is expected to announce an interest rate cut for the first time in four years at 2pm on Wednesday. It’s that moment that many economists see as the end of an era and the beginning of the end of the central bank’s fight against inflation.
The Fed’s prime rate – used to set the rates on everything from mortgages to car loans – has sat at a 20-year high for the last year, making it more expensive to borrow money.
This rate cut is a big deal for the economy. But it’ll take some time for American consumers to feel the effects. Here’s what to expect.
Why is the Fed cutting rates?
The Fed primarily looks at two things when considering the interest rate: inflation and the labor markets.
Related: US inflation softens to lowest level since February 2021 as Fed prepares to cut interest rates
Balancing price increases with unemployment is what the Fed refers to as its “dual mandate” – ensuring that inflation doesn’t get too high and that unemployment stays at a low level.
Following years of pandemic-related turmoil in the economy – waves of unemployment followed by massive stimuli from the federal government and various supply chain issues – inflation began to rapidly increase starting in 2022, topping at 9.1% in June 2022. The Fed hiked rates 11 times over a period of about a year and a half, from March 2022 until July 2023, the last time it increased rates.
Since then, inflation has come down to 2.5% – still above the Fed’s target of 2%, but a significant slowdown since its peak.
The labor market has remained strong but has started to cool. Unemployment hit historic lows as prices were increasing, but this year the unemployment rate went up to 4% for the first time since January 2022. Employers also seemed to be adding less jobs to the economy every month, a rapid cooling that had some worried that the country could be heading toward a recession.
As the most recent inflation and jobs data seemed to both show cooling, Fed officials started signaling late in the summer that it was time to cut rates.
“The time has come for policy to adjust. The direction of travel is clear,” Powell said in August during closely watched remarks.
When will we start to feel the impacts of the rate cuts?
Though the new interest rates will go into effect immediately, it will take a while for any tangible impacts to trickle down into different parts of the economy.
Perhaps the most immediate impacts were seen before the Fed actually cut rates. The highly responsive and volatile US stock market hit record highs at closing on Monday and Tuesday as investors prepared for the Fed’s rate cut.
