What Do Decreasing Rates Mean for Consumers?

Ever decreasing interest rates and Negative Interest Rate Policy (which Japan has a been longtime activist of and serves as a great example for developed economies across the globe) mean a lot for US consumers both directly and indirectly. Although interest rates are not near the lows currently and the US has yet to adopt NIRP, they really seem to be heading in that direction in previous years. More than ever artificial action is being used to keep our economy afloat and where we want it to be (not necessarily a bad thing!). As always, some experts are predicting a recession. If we do enter into a recession it would be interesting to see how the FED reacts in the medium to longer term.

We don’t know where interest rates will fall to but we do know that during the 2025 October FOMC the FED has a 99% probability to decrease rates again. Moreover, given softening economic data we will likely be in a falling interest rate environment for quite a while longer. As interest rates drop further, mortgages rates and other interest rates should follow as well.

Lower interest rates mean that homebuyers have more buying power. If rates are low, homeowners will be able to pay more for homes and this should in turn raise the price of real estate (although given how COVID has impacted both the residential and commercial real estate this remains to be seen).

Low interest rates are also meant to spur lending, investing and capital expenditures. If rates remain too low however, this will eventually lead to more inflation and less buying power from the perspective of the consumer. The FED and Jerome Powell have gotten a better handle on inflation and will look towards adhering to their dual mandate in the longer term (as is ultimately always the FED’s responsibility). So, how they handle rates and unemployment in the near term still remains to be seen as well.

Credit Card Interest Rates

Counter to common intuition, in today’s economic climate credit cards interest rates are not as directly correlated with the Fed Funds Rates as you might think. When the FEDs fund rate was 0%, credit card rates were high but they are still high now. Although with a lower LIBOR, credit card interest should theoretically be lower, they don’t correlate as much as you’d think. Moreover, credit card companies have actually been de-risking as of late and offering less than favorable terms on most unsecured lines of credit.

Investing with Current Interest Rates

You never want to fight the FED and during a time of economic easing. Logic would say that now is a good time to invest in the stock market (you never want to fight FED policy in regards to investing in the markets), however valuations have become quite bloated and the stock market has already received a V shaped recovery—well ahead any main street economic recovery. Due to this, you should continue to invest be but conservative and mindful of a recession if one arrives so that you can be prepared for what comes next, regardless of whether you are bullish or bearish.