The Federal Reserve is anticipated to cut short-term borrowing costs. The move, set to be a milestone event, is geared towards easing financial pressures on consumers.

Significance of the Move

The decision from the Fed comes after a series of increases in rates from March 2022 to July 2023, amounting to 5.25 percentage points. The key rate is expected to drop by half a point or a quarter, falling to around 4.5% or 4% by the end of the year.

Effects on Borrowing Costs

Though the policy rate won’t return to sub-2% levels as seen before 2022, a lower policy rate is expected to result in reduced borrowing costs. This change will translate to lower loan costs while increasing the average paycheck faster than prices as inflation cools.

Impact on Ordinary Americans

A looming question for many is how these rate cuts will affect ordinary Americans. Lower interest rates are aimed at making it less expensive for businesses and households to borrow, hence encouraging increased spending.

Cost of Credit

The cost of lending – including rates on home loans, credit cards, auto loans and student loans – has seen sharp increases as the Fed increased its policy rate.

Savings and Investments

The Fed’s changes to its benchmark rate has had a domino effect on banks, leading to increased rates in high-yield savings accounts and certificates of deposits. As the Fed signals rate cuts, these rates are expected to drop.

Housing Affordability

Despite a drop in mortgage rates, housing affordability remains a concern. A Fed interest rate cut will do little in the short term to change this, but it should eventually impact the housing market positively.

Article sourced from Ann Saphir and Lindsay Dunsmuir for Reuters with editing by Dan Burns and Andrea Ricci

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