(Bloomberg) -- Never miss an episode. Follow The Big Take daily podcast today.
Bloomberg’s Enda Curran joins host Sarah Holder to talk about what effects we can expect to see as the rate cut ripples through the US economy and the world — and hits our wallets.
Listen and follow The Big Take on Apple Podcasts, Spotify or wherever you get your podcasts
Terminal clients: click here to subscribe.
Here is a lightly edited transcript of the conversation:
Sarah Holder: Today was the day. After months of speculation, political pressure, expert opinions, data analysis, and many hours of handwringing by economists and policymakers, Federal Reserve Chair Jerome Powell. made his move.
Jerome Powell: Today the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by a half percentage point.
Holder: The Federal Reserve is cutting interest rates by half a percentage point. It’s a bigger cut than most people were expecting. And it brings rates down from about 5 and a half percent, to just under 5 percent.
Powell: We thought about what to do, and we concluded that this was the right thing for the economy, for the people that we serve, and that's, that's how we made our decision.
Enda Curran: What just happened was a pretty big surprise.
Holder: Enda Curran reports on the economy for Bloomberg
Curran: The Fed cut interest rates much more than expected. And, you know, something that only a minority of economists thought the Fed would do.
Holder: What went through your mind when you heard Powell say those words, when you heard that the cut would be 50 basis points?
Curran: You know, honestly, it said that the Fed is probably a little bit more nervous than people thought about the labor market with the unemployment rate ticking higher. It suggests you're confident that inflation is under control. But, now they're shifting their focus and they want to move early and fast in order to ensure the labor market doesn't get any worse.
Holder: Reactions have been pouring in. From the markets...
Curran: Market reaction was initially surprised, quite jolted, but I think it's calmed a little.
Holder: To politicians, like Vice President Kamala Harris, who called the rate cut quote “welcome news,” in a statement, but acknowledged that prices are quote “still too high.”
Curran: Some other Democrats, notably Senator Elizabeth Warren, who's critical of the Fed, making the point that, um — look, this is a sign the Fed has waited too long to cut and that they need to cut by more.
Holder: As of 5pm on Wednesday, Donald Trump — who’s been critical of the Fed — hasn’t yet weighed in. But earlier this week at a rally, he’d called the impending rate cut “political,” Suggesting a cut this close to the election could help Kamala Harris and her party in the election. Powell has consistently said that politics do not factor into Fed decisions.
It’s big news – and Enda says, as far as the economy is concerned, it’s good news.
Curran: It's good news that the economy has reached a point where rates can come down in this kind of fashion by the Fed and the jobs market is still strong.
Holder: Today on the show — The rate cut finally happened.. It was a big one. So now what? Its effects will soon start to ripple through the US economy and the world.
Which businesses and industries will feel this rate cut most? And how exactly will this impact regular households?
That’s today on the Big Take from Bloomberg News, I’m Sarah Holder.
Curran: Well, it has been a very tortured journey for the Fed.
Holder: Enda Curran has been on the edge of his seat all year, watching for when — and by how much — the Federal Reserve would cut rates.
Curran: Remember back in January, people were talking about Fed cutting rates by March. And then March came, people said, you know what, they'll be cutting rates by June. And then June came and that didn't happen either. And here we are at September, bartering towards 2025, and the Fed have finally started to cut interest rates.
Holder: Quite a long time…
Curran: with a lot of false dawns.
Holder: And now the economy embarks on the dawn of a new era. interest rates are coming down.
Curran: Well, this is something of a surprise, a bigger cut, I think, than most people anticipated. And it does suggest now maybe a hint of urgency among policymakers that perhaps they are worried about what's going on in the labor market. Maybe they're seeing more softness, more deterioration there than the average economist is seeing right now.
It certainly suggests that they want to front load and get on with easing policy. They're confident inflation is heading in the right direction. Now it's all about the jobs market.
Holder: The job market. That’s really what’s behind this bigger cut, Enda says. When rates are higher, people borrow less and spend less.. Companies make less money and that slows down hiring. The labor market can soften.
So to strengthen the labor market, the Fed can do the reverse – LOWER interest rates. Lower rates make people and businesses borrow more money… and buy more stuff. That means companies sell more stuff, and make more money. Those companies start to grow and expand and to hire. And that creates jobs.
Curran: Well, in truth, I think the economy had reached a point whereby it was crying out for lower borrowing costs. As I say, we've seen some softening in the jobs market, uh, companies are not hiring at the pace that they were hiring. And the inflation story has come off the boil. So by all accounts, the economy had reached a point where it was time for the Fed to lower interest rates. And that's where we seem to be at right now.
Holder: But the effect of rate cuts doesn’t hit all parts of the economy equally. Enda says some businesses and industries will be affected more deeply than others.
Curran: You're always going to look at the interest rate sensitive sectors. There's been a lot of focus on how much the housing sector respond, by the way. How will construction companies respond? How will appetite to go out and get a new mortgage at a cheaper rate respond? So that's a key part of the economy that has been gummed up by high rates. So keep an eye on what happens to the housing sector. Of course, then keep an eye on what happens with the cost of credit cards and bank loans. Will the banks pass on the cost, the, uh, the, the fed rate cut to the consumers? That's going to be a close area to keep an eye on and then keep an eye on how companies respond writ large. Do companies say, yes, the Fed is now on an easing path. It means the money is going to get cheaper. We will certainly consider new investment and expansion plans in the months ahead. Now, none of this will happen overnight.
Holder: But of course the housing market isn’t just made up of construction companies and real estate agencies. For a lot of people and families, their house is their biggest investment and their biggest debt.
So even a small change in interest rates can have a big effect on a mortgage loan and can mean thousands of dollars more or less in monthly payments. Enda says the higher interest rates we’ve seen over the past few years have put homeowners and would-be homeowners in a hard situation.
Curran: It's been a tricky bind for the housing market. So, on the one hand, if you are a person who bought a home at very low interest rates, say in the past 15 odd years, since the financial crisis. A, your mortgage cost is very low and you've built in a lot of equity in your home. So you're in a very good space.
The problem is, you don't want to sell your home and go out and have to get a new mortgage because it's more expensive. So that kind of side of the housing market has been frozen. It means there's been less inventory coming on the market, less supply. Now, if you haven't been lucky enough to buy a home, you've obviously been facing soaring housing costs and soaring mortgages.
Very difficult scenario for young people and throw in then there's a, this idea that there's just a shortage of a supply of housing overall. That's why housing supply is such a key part of the election campaign at the moment. It meant that housing had grind to a halt. Now the thinking is, with lower mortgage rates, eventually that will create people to, or allow people to sell their homes, will mean more stock comes on the market, more inventory.
It will encourage investors in construction companies to build homes, so more homes come on the market. And it will encourage those younger people who've been priced out of the market, they might get a mortgage and they might be able to go in and buy a home as well.
Holder: How soon might we feel those ripple effects? How soon might renters feel the effects of mortgage rate cuts, for example?
Curran: Well renters are getting a raw deal at the moment. Rent had been expected to be slowing sort of more than it is by now, but in the most recent inflation data, we saw an increase of 0.5 percent in the so called shelter index. That was the biggest increase this year for rent, suggesting that the rent story hasn't gone away, that landlords still have pricing power to put up rent.
So I think that side of things has been disappointing. It's the biggest part of the, of the inflation story. And, you know, one rate cut won't change it overnight.
Holder: So Enda, what about consumer spending? When interest rates go down, people tend to borrow and spend more, they're racking up more on credit cards, they're taking out car loans. What might that consumer spending bump look like this time?
Curran: Well, we've already had something of a consumer spending boom over the past few years, right with the pandemic, everybody was cashed up, they had high household savings. So there has been something of a boom. And, and you know, we haven't really seen a dramatic downturn on Main Street. You listen to the earnings reports from the big box retailers.
Of course, they're saying consumers are watching their wallet a bit, but we haven't seen a dramatic downturn in the retail space. Nonetheless, if the message to households is that mortgage rates are coming down, the cost of credit card loans coming down, well, obviously, that is a signal that things are going to be better in terms of what their ambitions are for, for buying and spending in the high street.
Holder: When the Fed lowers interest rates, it can mean more money in people’s pockets, mortgage rates can drop, and credit card interest rates can come down.
Now interest rates in the US don’t just affect the housing market and consumer spending. They have a massive impact on the US economy and the global economy.
More on that after the break.
Holder: We’ve been talking about today’s rate cut and what effect the Fed’s actions might have on the economy with Bloomberg reporter Enda Curran.
We’ve hit housing, and consumer spending, but Enda says right now, he’s really got his eye on small businesses and how lower interest rates — which would mean cheaper loans — might affect them.
Curran: Small businesses are the backbone of the economy. They're the biggest employer in the US. They routinely complain about not just the cost of their loans, but their ability, ability to get financing. So lower costs of borrowing would certainly be welcomed by them.
Obviously that will buy confidence that will inject confidence in those small business people who are hoping to invest to get a business off the ground, that it can get a loan. They can manage that loan and I can put that loan to work.
Holder: That new sense of confidence will also likely ripple out to other investors that fuel start-up growth – like venture capitalists that may have been squeamish about risk-taking while rates were high.
Curran: If they're getting nervous about putting in money into an investment in a world of very, very high rates, given the cost of financing. Well, likewise, if they think the cost of a loan six months from now, it's going to be cheaper. They will take another look at investments that might've passed on. So there's no doubt cheaper borrowing costs will be a boon for that side of the economy.
Holder: And this boon for businesses, could also be a boon for the job market.
Curran: If companies out there are getting a signal that their loans are going to be cheaper than they otherwise would have been, they will, of course, realize this is an opportunity to think about investing. This is an opportunity to think about expansion. This is an opportunity to think about adding on staff, or at the very least, not cutting staff. So you would expect to see a fill up for industrial activity. And, you know, the manufacturing sector, by the way, has been one of the sectors of the economy that has kind of, uh, been sluggish, even as the rest of the economy sort of kept going pretty well. So you would expect to see that relief flowing through to that side of things.
Holder: We've been talking a lot about the US and the economic effects that might be felt locally, domestically. What about globally? What effects are we expecting to see in other countries?
Curran: So the Fed remains the central bank for the world because the dollar is the big currency used around the world to settle trade. So whatever the Fed does spills over to the cost of US dollar denominated loans and bonds taken out by other governments and other companies right around the world. So it will have a ripple effect.
And when you have the Fed signaling, That they think inflation is coming under control and they can start cutting interest rates. That takes a lot of pressure off developing economies or emerging, emerging market economies to, they can follow suit and start to bring down their own borrowing costs in line with the Fed.
So it is a sigh of relief for the rest of the world.
Holder: That sigh of relief heard around the world — comes after a long period when it felt like everyone was holding their breath. Despite calls to cut rates earlier, Powell and the Fed waited to pull the trigger – until they were confident inflation was indeed getting back under control.
Powell: If you go back, the policy stance we adopted in July of 2023, uh, came at a time when unemployment was 3.5 percent and inflation was 4.2%. Today, unemployment is, is up to 4.2 percent. Inflation is down to a few tenths above 2. So we know that it is time to recalibrate our, our, our policy to something that is more appropriate, given the progress on inflation and on, uh, employment, moving to a more sustainable level.
Holder: What will you be watching for in the next few weeks and months that might tell you whether this move came too late or just in time?
Curran: I think from here, the singular most important variable to keep an eye on is the jobs market. Let's just say inflation continues to trend in the right direction and that continues to head towards the Fed's target. Let's assume that carries on.
Then it's all about what's going to happen to people's jobs. We know at the moment that companies have slowed their pace of hiring dramatically. We see that in the data. In fact, it was even weaker than we anticipated due to recent revisions. And even though we are not seeing, you know, major headlines about massive layoffs in companies around the US, we know that the unemployment rate is increasing.
And has been increasing steadily over the past year. So there's no doubt Fed feels that now is the time to act. And everything that they do from here will be defined by what's happening in the jobs market. if we get another weak reading for jobs, for the September jobs data, maybe for the October jobs data, uh, when the Fed comes back in November, you'll, you'll expect a lot of people will be anticipating yet another rate cut by the Fed then.
Holder: Powell said at least right now, there’s agreement from all 19 of the voting members of the Federal Reserve that there should be more interest rate cuts before the end of the year.
Powell: And so there was a lot of discussion, um, back and forth I would, I would add, All 19 of the participants wrote down multiple cuts this year, all 19.
Still, the size and scope of these further rate cuts remain an open question. And Enda says that will depend on how the economy reacts to this rate cut.
But after the last few years of pandemic-induced turmoil for the US economy, Enda says today’s announcement marks a turning point.
Curran: It's a very important moment. The U. S. economy has suffered significantly from inflation over the past couple of years. It's been the worst inflation crisis in decades. That, in turn, forced the Fed to respond by raising interest rates at the fastest pace since the early 1980s. And they increased rates to the highest level in, in more than two decades. So all of this has been serious, has had a serious material impact on the U. S. economy.
Now, the good news is, That the economy held up despite all of that people held on to their jobs in a way that they hadn't been expected to consumers held on to their confidence and they kept spending. So there was a good, a good story underlying all of the stress in the economy.
But we're now at a point where the central bank is basically saying they think the inflation battle has turned a corner. And if everything remains equal from here, barring a shock, they can continue to bring down interest rates at a steady pace, and that would be good news for everyone.
Good news, not just in terms of their, you know, their opportunities to get a loan or in terms of their bank account, but a good news that signals the Fed managed to tame inflation without blowing up the jobs market.
Holder: I’m Sarah Holder, and this is “The Big Take,” from Bloomberg News.
©2024 Bloomberg L.P.
