Local experts weigh in on Fed rate cut

Local experts say the Federal Reserve's Sept. 18 rate cut will be welcome news for some while adversely impacting others.

The Fed reduced its benchmark rate by 50 basis points, above expectations of 25 basis points, marking the first cut since 2020. The target range for the federal funds rate is now 4.75% to 5% with a Fed vote of 11-1, according to a statement released by the Fed's Federal Open Market Committee.

"Recent indicators suggest that economic activity has continued to expand at a solid pace," the FOMC statement reads. "The committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance."

Don Davis, senior portfolio manager with Commerce Bank, said the largest impact would be felt in consumer borrowing.

"Borrowing costs are going to go down almost immediately," he said. "The ability for customers to borrow will be impacted basically overnight."

Davis noted, however, that investments in the money market and certificates of deposit could be adversely affected. CDs and money market accounts tend to offer higher returns when the Fed's interest rate is higher, officials say.

Davis said the rate change could "force their decision-making in another direction."

In the real estate market, the Fed's rate cut will help with affordability and supply, said Jeff Kester, CEO of the Greater Springfield Board of Realtors.

"We have an affordability situation right now. Every little bit helps," Kester said. "They did 50 basis points, instead of 25, so that's a good sign. It helps with affordability."

A primary reason the market has an affordability problem is because of a lack of supply, Kester said. The issue is that property owners who bought real estate when interest rates were lower have been hesitant to "step up" to more expensive properties, so they've essentially been locked in, he said.

"Velocity is a thing in real estate. For many people, if they own the $150,000 house now, they may be ready to step up to the $250,000 or $300,000," Kester said. "Anytime the interest rate moves closer to what they're paying, it may make it more possible for them to make a move and open up housing supply for someone else."

While acknowledging consumer benefits could be on the horizon with the rate cut, Missouri State University economics professor David Mitchell said he's personally unsure if the timing is right for the Fed's rate cut decision.

"I'm wondering if they're jumping the gun," said Mitchell, who directs MSU's Bureau of Economic Research and Center for Economic Education. "I'm not convinced they're anywhere near slaying the inflation dragon."

With the U.S. inflation rate this year at roughly 2.5%, the rate would need to drop to 1.5% next year to reach an average of 2%, he said.

"I don't see that on the horizon for a long time," Mitchell said.

More rate cuts are expected in the near future, according to financial industry analysts.

Davis said the current consensus is that two more rate cuts could be made by year's end. He predicted that the Fed could cut its rate by another 25 basis points apiece at meetings in November and December, bringing the full suite of cuts to a full 100 basis points by the end of 2024.