Impacts of a FED Rate Cut

The impact of FED rate hikes and cuts always remains to be seen in terms of its immediate impact on the economy. Interest rates can tend to be quite sticky and the fed funds rates usually takes about 12 months to have a real impact on the economy. Interest rates go up a lot quicker than they go down. Due to this, a lowering of the Fed Funds Rate will not have an overnight change in the real economy. And the impact on easing prices for big ticket items and consumer durables like houses, cars, etc., usually has a significant lag. This is just the way our economy works. Economists and the Federal Reserve are always going based off present data however data is always lagging behind to some degree and is always based on past performance. Whenever GDP or inflation for that matter is reported it’s being reported for the previous quarter. Economists and data specialists can only give forward looking guidance based on past data and expectations.

They Take a Lot Quicker Than They Give

In terms of interest rate hikes and falls. Interest rates go up much quicker than they go down. This is just the natural way of the financial world. Lenders are typically quick to pass any increase in the cost of capital to consumers as soon as it arises, sometimes even pre-emptively in anticipation of an interest rate hike. However, when rates drop, there is still a lag and the decline in interest rates consumers receive is typically much slower. The lag can sometimes take up to 12 months for there to be an equivalent drop in interest rates. This also tends to happen with grocery store prices and other baskets of goods commonly measured by inflationary pressures. When consumers have high expectations of prices, corporations are typically slow to decrease prices even if input prices have come down substantially.

How Does It Affect Consumers with Savings Products?

Anyone with savings products and interest generating products like a high yield savings accounts will see a sharp decrease in yield but consumers looking for cheaper prices will have to wait a lot longer than that. However, as the market corrects itself and reaches equilibrium in the long term, big ticket items will eventually come down in price with lower interest rates. Theoretically, the price of a home should have an inverse relationship with interest rates, although it doesn’t always work out that way.

How Will This Impact Consumers That Carry Debt Currently?

Consumers that are servicing debt won’t see much of an immediate impact and if their mortgage rates are locked in, it won’t really matter much anyway. Home prices and interest rates have an inverse relationship, especially during a recession. Theoretically, lower interest rates would mean less economic friction, more movement of money and easier access to capital. This is in general a great thing for economic continuity and free enterprise, however these changes can take some time to take hold and aren’t something that will appear overnight.