After years of high interest rates to combat soaring inflation, some economists think the time has finally come for the nation's central bank to give Americans financial relief by cutting those rates.
Lower rates would allow Americans to take out cheaper loans, helping out businesses and consumers.
Mark Zandi, chief economist at Moody's Analytics, said that when cuts do come, he expects them to "provide immediate relief" to small businesses, consumers, and lower- and middle-income households. Business owners may find it easier to take out bank loans and consumers who rely on credit cards could end up with cheaper borrowing costs.
But those cuts may not be here just yet. At the end of July, the Federal Open Market Committee will announce its next decision on interest rates. CME FedWatch, which estimates interest rate probabilities based on market trades, forecasts a 93% chance the Fed will hold rates steady — and Fed Chair Jerome Powell has emphasized that the Committee needs to feel confident inflation is cooling enough before the Fed starts to cut.
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It's a delicate balancing act between risking a recession and renewed price spikes. "If we loosen policy too late or too little, we could hurt economic activity," Powell said before the Senate Committee on Banking, Housing, and Urban Affairs on July 9. "If we loosen policy too much or too soon, then we could undermine the progress on inflation."
But many long-time Fed watchers and macroeconomists think the war on inflation has been won, and it's time to cut.
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Zandi thinks the Fed has "achieved their objective of full employment and inflation at target."
Claudia Sahm, founder of Sahm Consulting and former Fed economist, agrees. "Frankly, it's been time for a while," Sahm told Business Insider. "We have seen the US economy has been getting back on track, normalizing, rebalancing, all of the Fed's catchwords for some time now."
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The consumer price index, which measures inflation, rose 3.0% year over year in June — a decrease from May's 3.3% reading — showing that inflation is inching toward the Fed's 2% target. Real US GDP has already been growing at a cooler rate. It increased 1.4% at an annualized rate in the first quarter of 2024 after a 3.4% increase in the fourth quarter of 2023. The labor market has seen the unemployment rate climb to above 4%, and job gains have cooled, though the US remains far from a recession.
As Powell has consistently said, cutting interest rates too early could end up hurting Americans if it requires the Fed to hike again at a later time. But keeping interest rates high for too long also has consequences — it's keeping housing costs high, businesses are struggling to invest, and Americans are finding it more expensive to take out loans and different forms of credit.
While economists who talked to BI described the current economy as good, they also noted that cutting interest rates could give Americans financial relief and help the economy thrive.
"Right now, the Federal Reserve with keeping interest rates high is putting pressure on the economy, is making it harder for consumers to buy," Sahm said. "They have to take out credit. It's making it harder for businesses to invest."
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Why economists say it's time to cut interest rates
For months, some Democratic lawmakers have been urging Powell to cut interest rates sooner rather than later to give Americans financial relief. Sen. Elizabeth Warren joined three of her Democratic colleagues in writing a letter in January to Powell saying that "interest rates are still too high for many American families, who already cannot afford to pay rent or buy their first homes."
Some economists have recently been pointing to similar concerns with the Fed keeping interest rates high. "We got inflation under control, but we could end up in a recession, or we could just end up in a much weaker economy than was necessary because it just waited too long," Sahm said.
As Sahm pointed out, it would take time for reduced interest rates to "flow through to the economy."
"You want to begin a process of taking the pressure off of the economy," Sahm said. "The best way to do this would be gradually."
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Waiting longer to start this gradual process of cuts could mean being up against unwelcome scenarios, such as the labor market taking "a turn for the worst," Sahm said. In that case, that could mean the Fed may have to make cuts more quickly.
Brian Rose, senior US economist at UBS, told BI that if the Fed doesn't cut rates soon, there could be a "more serious slowdown in the labor market, undesirable rise in the unemployment rate, or more layoffs, and things like that."
"The economy seems like it's already growing below trend, and if you leave rates at this level, which is quite restrictive, you can only expect the economy to slow further," Rose said.
True to form, Powell has not given any indication as to when interest rate cuts might happen, but when they do, it could provide relief to businesses and consumers alike.
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Zandi said interest rates on credit cards and Buy Now, Pay Later rates could come down, along with a decline in auto lending rates and mortgage rates.
"Right now, we're at a 7% fixed mortgage rate, and that's just unaffordable for almost everyone," he said. "But if it gets closer to six, then I think that would make a big difference for people. And we see more home sales and transactions."
Even Fed officials are pointing at recent economic data as proof relief will soon be warranted. Chicago Federal Reserve President Austan Goolsbee told The Wall Street Journal that the US economy has proven it's ready to ease up on tight monetary policy.
"You only want to stay this restrictive for as long as you have to, and this doesn't look like an overheating economy to me," Goolsbee said.
