The Rate Cuts the Fed is Signaling Can’t Come Soon Enough for Consumers

Key Takeaways

• The Federal Reserve on Wednesday left its key rate unchanged at a 23-year high, while indicating a rate cut could happen as soon as September.
• Consumers are getting impatient with high rates. Two-thirds of those surveyed recently said rates are too high, and nearly three-fourths of those who believe rates are too high said interest costs have affected their household finances.
• More families are unable to pay essentials and are backing off on spending due to high inflation.
• Many economists believe that the Fed needs to cut rates in September due to the slowing labor market and declining consumer confidence.

Consumers were likely hoping for an interest rate cut this month, but the Federal Reserve is still holding out.

The Fed decided to keep its fed funds rate at the same level Wednesday, making it a year in which the influential rate has stayed at a two-decade high. An elevated fed funds rate pushes up all types of borrowing costs, including those on credit cards, mortgages, and auto loans.

The Fed has kept rates at record highs in order to slow the economy and, in turn, tame inflation. In other words, household budgets are taking a hit from both stubborn prices and high-interest rates.

More than two-thirds of consumers polled by Morning Consult recently said interest rates are too high, and almost three-fourths of those who thought rates are too high said interest costs have affected their household finances. Many respondents said they have cut back on non-essential spending as a result of high rates.

“Continuing to keep rates elevated could be harmful for consumers and the economy as a whole, which is already showing signs of cooling,” said Sofia Baig, economist for Morning Consult, in an email.

What is the Fed Waiting For?

Elevated interest rates are not calculated in cost of living measures such as the Consumer Price Index, but economists have proven these increases are costly to average families.

A group of four economists including former Treasury Secretary Larry Summers found some of the differences between dwindling consumer sentiment and strong economic growth could be attributed to the increased cost of borrowing money.

Experts say that to help consumers, the Fed needs to cut rates soon.

A softening labor market and stagnant consumer spending will likely encourage the central bank to cut rates at their next meeting in September, economists said. The central bank’s chair, Jerome Powell, left the door open for that possibility following their meeting this week.

However, the majority of consumers are not confident that will happen. More U.S. adults believe interest rates will be higher next year than lower, according to Morning Consult.

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Conclusion

Consumers are growing increasingly frustrated with high interest rates, as they believe it is negatively impacting their household finances. The Federal Reserve’s decision to keep rates unchanged at a 23-year high has disappointed many who were hoping for a rate cut. However, economists argue that a rate cut is necessary to support consumers and the economy, especially in light of a softening labor market and stagnant consumer spending. While the majority of consumers are not confident that rates will be lowered, experts believe that the Fed needs to take action soon to alleviate the burden on households. As the debate continues, consumers eagerly await the rate cuts that the Fed is signaling.