By Helaine Olen, reporter in residence at the Omidyar Network
On Wednesday, the Federal Reserve lowered its benchmark interest rate by half a percentage point. The action will take the rate to between 4.75% and 5% immediately. The Fed also announced more cuts are likely before the end of the year.
The combination suggests the Fed is taking the threat of a slowdown to the American economy seriously. It's about time -- in fact, it's long past time.
Yes, at first glance the U.S. economy, appears to be doing "basically fine," as Powell put it in his press conference today. The stock market is booming, and retail sales and consumer confidence remain solid. But under the surface, signs of trouble are increasing.
Credit card debt has been rising over the past year. So, too, have credit card delinquencies, which are now at their highest rate since the 2008 financial crisis. Auto loan delinquencies are up as well. Unemployment, though still a relatively low 4.2%, is nearly half a percentage point higher than a year ago. Payroll growth is slowing, and the job market is stagnating, particularly for white-collar workers.
As a result, many Americans are, if not completely abandoning the YOLO attitudes of recent years, getting increasingly picky about their spending. While overall retail sales are inching higher, restaurant sales are flatlining, and the post-pandemic travel bonanza is slowing, with hotels reporting less demand from vacationers. Aside from Taylor Swift, musicians are struggling to draw crowds. Even Jennifer Lopez canceled a planned tour this summer in the face of flagging sales. Other acts, especially on the nostalgia circuit, joined forces, giving audiences two-for-one deals, seemingly to make it more likely they could fill up the seats. (Elvis Costello and Daryl Hall toured together this spring and summer. So did Rick Springfield and Richard Marx.)
That this would happen has all been clear for some time -- the last of the savings built up over the pandemic ran out in March -- but the Fed cavalierly prioritized its battle against inflation even as it became increasingly obvious that the battle against pandemic-era price increases and gouging is all but won. Last month's consumer price index came in at an annual rate of 2.6%, just a tick higher than it was pre-pandemic. Gasoline prices average about $3.20 a gallon nationally, down 50 cents since April, and some experts think the national average could go below $3. Major retailers like Walmart and Target have dropped prices on thousands of items, so much so they've put pressure on traditionally lower-price-point dollar stores.
The Biden administration has already moved to take on corporate price gougers, and Vice President Kamala Harris says she will continue that effort if elected. Last month, the Justice Department sued software company RealPage, alleging its rent management software offered landlords a backdoor way to collude on rental prices.
The inflation that's hurting American families the most right now is high interest rates -- and the Fed's rate cut can do something about that. Credit card debt now comes with an average rate of well over 20%, while store-branded cards are at a record high with an average annual rate of 30.45%, according to a recently released study from Bankrate. The Fed's move Wednesday should begin to bring these eye-popping rates down.
The same is true of housing costs: While the interest rate on mortgages is most closely tied to the yield on 10-year Treasury bonds -- which are already coming down as inflation eases -- that number is also often influenced by the benchmark rate. The new cut will almost certainly make it easier for millions of Americans to find new homes.
Donald Trump and some of his Republican supporters will most likely argue this was a political decision by the Fed. Trump has said in the past that he believes interest rates are too high but that making a decision this close to the presidential election is "something they shouldn't be doing."
Please. This isn't an attempt to throw the election. It's something that should have been done months ago. Powell admitted as much, saying Fed officials "may have cut earlier" had they had the economic knowledge they have now in the summer.
As for Trump, always remember: He's only out for one person -- himself. That's why he's complaining both that interest rates should come down and that inflation is higher than ever in U.S. history (as someone who lived through the 1970s, he should know that's a lie). The only purpose of this incoherent position is to argue for his election.
Since 1977, the Federal Reserve has had a dual mandate: to balance and maximize price stability with maximum employment. It's finally back on both cases -- and not a moment too soon.