FEDS SLASH INTEREST RATE A HALF-POINT; STOCK MARKET HITS ALL-TIME HIGH IN RESPONSE

Update September 19, 2024 -- The stock market closed at all time highs across the board today, in response to yesterday's interest rate cuts by the Federal Reserve. The Dow Jones Industrial Average jumped over 500 points today, closing above 42,000 points for the first time in American history. The S&P 500 also closed at a record high, closing at 5713.64, the most ever.

By Miriam Raftery

September 18, 2024 (Washington D.C.)  -- In good news for homebuyers and other borrowers, the Federal Reserve today lowered interest rates by a full half percentage point.  It’s the first interest rate reduction since 2020 and more than the quarter point reduction that most market analysts had predicted. That brings rates down to between 4.75% and 5.25%, Forbes reports.

Moreover, Fed staff forecasts another cut in November or December, and potentially more cuts in 2025.

Fed Chairman Jerome Powell said of the economy,  “You see growth at a solid rate. You see inflation coming down. You see a labor market that’s still at very solid levels,” adding that he does not anticipate any recessionary effects from the lower Fed rates.

The Fed controls the federal funds rates (interest charged on cash reserve transactions between banks). But the central bank’s rate decisions typically spur lenders to lower rates, which could impact everything from car loans to credit card rates and student loan interest.

The move could spark a boom in homebuying.  Mortgage rates had already begun falling, hitting a 18-month low last week of 6.2% on 30-year fixed loans in anticipation of rate reductions.

Rate cuts traditionally boost stock prices, too. Stock rates rose significantly yesterday in anticipation of today’s widely forecast rate reduction, and continued to rise shortly after the announcement, though dipping slightly by day’s end . The DOW jumped 300 points this morning, then fell 103 point or 0.3%, CNN reports.

President Joe Biden posted his reaction on X.  “We just reached an important moment: Inflation and interest rates are falling while the economy remains strong. The critics said it couldn’t happen—but our policies are lowering costs and creating jobs.”

The feds had raised interest rates previously to help rein in inflation, and the effects are now being seen. Inflation peaked at 7% in 2021,but is now down to 2.5%.

In May, the Washington Post reported that several major grocery retailers have begun actually lowering grocery prices, including Target, Walmart, and Aldi,though prices remain above pre-COVID rates.

Vice President Kamala Harris has pledged to work to reduce grocery prices further if elected, including banning price gouging by grocery retailers. She also announced plans for $25,000 in down payment assistance for certain first-time homebuyers and tax incentives for builders of starter homes, though these proposals likely will need Congressional approval.

Former President Donald Trump has criticized the Biden administration on inflation (a global problem following supply interruptions during COVID and disruptions in oil due to war in Ukraine).  He has pledged to drill for more domestic oil and when asked about reducing grocery prices, said he would increase tariffs on imported food, though analysts say the latter would actually increase costs for consumers by restricting cheaper imports.

One downside of the Feds lowering rates is for those with high-yield savings accounts, which will likely see interest rate reductions as a result.

Forbes sums up today’s rate cut as “a move that will have a major impact on the finances of Americans across the board, making borrowing cheaper, though the golden days of high-yield savings instruments may be over.”