Bloomberg Audio Studios, podcasts, radio news.
Today was the day. After months of speculation, political pressure, expert opinions, data analysis, and many hours of hand ringing by economists and policymakers, Federal Reserve Chair Jerme Powell made his move today.
The Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by a half percentage point.
The Federal Reserve is cutting interest rates by half a percentage point. It's a bigger cut than most people were expecting, and it brings rates down from about five and a half percent to just under five percent.
We thought about what to do, and we concluded that this was the right thing for the economy, for the people that we serve. And that's how we made on a sosion.
What just happened was a pretty big surprise.
And a current reports on the economy for Bloomberg cut it interest.
Rates much more than expected. And you know, somebody that only a minority of economists thought the Fed would do.
What went through your mind when you heard Powell say those words, When you heard that the cut would be fifty basis points.
You know, honestly, it said that the Fed is probably a little bit more nervous than people thought about the labor market. With the unemployment rate taking higher. It suggests they're confident that inflation is under control, but now they're shifting their focus and they want to move early and fast in order to ensure the labor market doesn't get any worse.
Reactions have been pouring in from the markets.
Rock reaction was initially surprised, quite jolted, but I think it's calmed a.
Little to politicians like Vice President Kamala Harris, who called the rate cut quote welcome news in a statement, but acknowledged that prices are quote still too high.
Some other Democrats, notably Senator Elizabeth Warren, who's critical of the FED, making the point that look, this is a sign to FED is a way to too long to cut and that they need to cook by more.
As of five pm on Wednesday, Donald Trump, who's been critical of the FED, hasn't yet weighed in, but earlier this week at a rally, he'd called the impending rate cut political, suggesting a cut this close to the election could help Kamala Harris and her party in the election. Powell has consistently said that politics do not factor into Fed decisions. It's big news, and Enda says, as far as the economy is concerned, it's good news.
That's good news that economies has reached a point where rates can come down in this kind of fashion by the fade, and the jobs market is so.
Strong today on the show, the rate cut finally happened. It was a big one. So now what its effects will soon start to ripple through the US economy and the world. Which businesses and industries will feel this rate cut most, and how exactly will this impact regular households. That's today on the Big Take from Bloomberg News. I'm Sarah Holder.
Well, it has been a very torture journey for.
The Fed, and the current has been on the edge of his seat all year watching for when and by how much the Federal Reserve would cut rates.
Remember back in January, people were talking about Fed cutting rates by March, and then March came. People said, you know what, they'll be cutting rates by June, and then June came and that didn't happen either. And here we are at September, barreling towards twenty twenty five, and the Fed have finally started to cut interest rates.
Quite a long time.
And with a lot of false dawnes.
And now the economy embarks on the dawn of a new era. Interest rates are coming down.
Well, there's something of a surprise, a bigger could, I think, than most people anticipated. And it does suggest now maybe a hint of urgency among policymakers that perhaps they are worried about what's going on in the labor market. Maybe they're seeing more softness, more deteriorations there than the average economists is seeing. Right now, it certainly suggests that they want to front load and get on with easing policy,
their confident inflation is heading in the right direction. Now, it's all about the jobs market.
The job market, that's really what's behind this bigger cut. And it says when rates are higher, people borrow less and spend less, companies make less money, and that slows down hiring. The labor market can soften. So to strengthen the labor market, the Fed can do the reverse lower interest rates. Lower rates make people and businesses borrow more money and buy more stuff. That means companies sell more
stuff and make more money. Those companies start to grow and expand and to hire, and that creates jobs.
Well, in truth, I think the economy to reach the point whereby it was crying out for lower boring costs. You know, as I say, we've seen some softening in the jobs market, but companies are not hiring at the pace that they were hiring, and the inflation story has come off the boil. So by all accounts, the economy had reached the point where it was time for the Fed to lower interest rates, and that's where we seem to be at right now.
The effect of rate cuts doesn't hit all parts of the economy equally, and it says some businesses and industries will be affected more deeply than others.
You're always going to look at the interest rates sensitive sectors. There's been a lot of focus on how much the housing sector respond. By the way, how will construction companies respond, How will appetite to go out and get a new mortgage at a cheaper rate respond. So that's a key part of the economy that has been gummed up by high rates. So keep an eye on what happens the housing sector.
But of course, the housing market isn't just made up of construction companies and real estate agencies. For a lot of people and families, their house is their biggest investment and their biggest debt, so even a small change in interest rates can have a big effect on a mortgage loan and can mean thousands of dollars more or less in monthly payments. Enda says, the higher interest rates we've seen over the past few years have put homeowners and would be homeowners in a hard situation.
It's been a tricky bind for the housing market. So under one hand, if you are a person who bought a home at very low interest rates, say in the past fifteen odd years since a financial crisis a, your mortgage cost is very low and you've built in a lot of equity in your home, so you're in a very good space. The problem is you don't want to sell your home and go out and have to get a new mortgage because it's more expensive. So that kind of side that housing market has been frozen. It means
there's been less inventory coming on the market, less supply. Now, if you haven't been lucky enough to buy a home, you've obviously been facing soaring housing costs and soaring mortgages, very difficult scenario for young people. And throw in then there's this idea that there's just a shortage of a supply of housing overall. That's why housing supply is such a key part of the election campaign. At the moment,
it meant that housing had grind to a hold. Now the thinking is, with lower mortgage rates, eventually that will create people to or allow people to sell their homes. Will mean more stock comes on the market, more inventory. It will encourage investors in construction companies to build homes, so more homes come on the market, and it will encourage those younger people who've been priced out of the market. They might get a mortgage and they might be able to go in and buy a home as well.
How soon might we feel those ripple effects? How soon might renters feel the effects of mortgage rate cuts?
For example, Well, renters are getting a raw deal at the moment. Rent had been expected to be slowing sort of more than it is by now. But in the most recent inflation data we saw an increase of zero point five percent in this so called shelter index. That was the biggest increase this year for rent, suggesting that the rent story hasn't gone away, that landlords still have pricing power to put up rent. So I think that side of things has been disappointing. It's the biggest part
of the of the inflation story. And you know, one way cut won't change it overnight.
So and what about consumer spending? When interest rates go down, people tend to borrow and spend more. They're racking up more on credit cards, they're taking out carlowans. What might that consumer spending bump look like this time.
Well, we've already had something of a consumer spending boom over the past few years. Right with the pandemic. Everybody was cashed up, they had high household savings, so there has been something of a boom. And you know, we haven't really seen a dramatic downturn on main street. You listen to the earnings reports from the big box retailers. Of course they're saying consumers are watching their wallet a bit,
but we haven't seen a dramatic downturn in the realtail space. Nonetheless, if the message to households is that mortgage rates are coming down, the cost of credit card loans coming down, well obviously that is a signal that things are going to be better in terms of what their ambitions are for buying and spending on the high street.
When the FED lowers interest rates, it can mean more money in people's pockets. Mortgage rates can drop, and credit card interest rates can come down. Now, interest rates in the US don't just affect the housing market and consumer spending. They have a massive impact on the US economy and the Globalmy more on that after the break. We've been talking about today's rate cut and what effect the Fed's actions might have on the economy with endocurrent with hit
housing and consumer spending. But Enda says right now he's really got his eye on small businesses and how lower interest rates, which would mean cheaper loans, might affect them.
Small businesses are the backbone of the economy. They're the biggest employer in the US. They routinely complain about not just the cost of their loans, but their ability to get financing. So lower costs of boring will certainly be welcome by then. Obviously, that will boy confidence. That will inject confidence and those small business people who are hoping to invest to get a business off the ground that it can get a loan, they can manage that loan, and I can put that loan to work.
That new sense of confidence will also likely ripple out to other investors that fuel startup growth, like venture capitalists that may have been squeamish about risk taking while rates were high.
If they're getting nervous about putting in money into an investment at a world of very high rates given the cost of financing, well, likewise, if they think the cost of a loan six months from now is going to be cheaper, they will take another look at investments that might have passed on. So there's no doubt cheaper boring costs will be a boon for that side of the economy.
And this boon for businesses could also be a boon for the job market.
If companies out there are getting a signal that their loans are going to be cheaper than the otherwise would have been, they will of course realize this is an opportunity to think about investing, that this is an opportunity to think about expansion, that this is an opportunity to think about adding on staff, or at the very least not cutting staff. So you would expect to see a
fillip for industrial activity. And you know, the manufacturing sector, by the way, has been one of the sectors of the economy that has kind of been sluggish, even as the rest of the economy sort of kept going pretty well. So you would expect to see that relief flowing through to that side of things.
We've been talking a lot about the US and the economic effects that might be felt locally domestically, what about globally. What effects are we expecting to see in other countries.
So the FED remains essential bank for the world because the dollar is the big currency used around the world to settle trade. So whatever the FED does spills over to the cost of US dollar denominated loans and bonds taken out by other governments and other companies right around
the world. So it will have a ripple effect. And when you have the FED signaling that they think inflation's coming under control and they can start cutting interest rates, that takes a lot of pressure off developing economies or emerging market economies too. They can follow students sorry to bring down their own boring costs in line with the FED. So it is cyberly for the rest of the world.
That sigh of relief heard around the world comes after a long period when it felt like everyone was holding their breath despite calls to rates. Earlier, Powell and the FED waited to pull the trigger until they were confident inflation was indeed getting back under control.
If you go back, the policy stance we adopted in July of twenty and twenty three came at a time when unemployment was three and a half percent and inflation was four point two percent. Today, unemployment is up to four point two percent, inflation is down to a few tents above two. So we know that it is time to recalibrate our policy to something that is more appropriate given the progress on inflation and on employment moving to a more sustainable level.
What will you be watching for in the next few weeks and months that might tell you whether this move came too late or just in time.
I think from here the singular most important variable to keep it on is the jobs market. Let's just say inflation continues to trend in the right direction and that continues to head towards the fed's target. Let's assume that carries on. Then it's all about what's going to happen people's jobs. We know at the moment that companies have slowed their pace of hiring dramatically. We see that in the data. In fact, it was even weaker than we anticipated.
Due to recent revisions. And even though we are not seeing, you know, major headlines about massive layoffs and companies around the US, we know that the unemployment rate is increasing and has been increasing steadily over the past year. So there's no doubt FED feels that now is the time to act, and everything that they do from here will
be defined by what's happening in the jobs market. But if you get another week reading for jobs for the September job data, maybe for the October job data, when the FED comes back in November, you'll expect a lot of people will be anticipating get another rate cut by the FED.
Then Powell said that at least right now, there's agreement from all nineteen of the voting members of the Federal Reserve that there should be more in dress rate cuts before the end of the year.
And so there was a lot of discussion back and forth. I would add that all nineteen of the participants wrote down multiple cuts this year, all nineteen.
Still the size and scope of these further rate cuts remain in open question, and Enda says that will depend on how the economy reacts to this rate cut. But after the last few years of pandemic induced turmoil for the US economy, and it says today's announcement marks a turning point.
It's a very important moment. The US economy has suffered significantly from inflation over the past couple of years. Has been the worst inflation crisis in decades. That in turn forced the Fed to respond by raising interest rates at the fastest paced since the early nineteen eighties, and they increase rates to the highest level in more than two decades. So all of this has been serious, has had a
serious material impact on the US economy. Now, the good news is that the economy held up despite all of that. People held on to their jobs in the way that they hadn't been ex back to two. Consumers are held on to their confidence and they kept spending. So there was a good, a good story underlying all of the
stress in the economy. But we're now at a point where the Central Bank is basically saying they think the inflation battle has turned the corner and if everything remains equal from here, barring a shock, they can continue to bring down interest rates at his steady pace, and that would be good news for everyone. Good news not just in terms of their you know, their opportunities to get
a loan or in terms of their bank account. But good news that as signals the FRED managed to tame inflation without blowing up the jobs market.
I'm Sarah Holder and this is the Big Take from Bloomberg News. This episode was produced by Thomas Leu. It was edited by Stacy Vannick Smith and Cecile Dora. It was fact checked by Alex Udia. It was mixed by Blake Naples. Our senior producer is Naomi Shaven. Nicole beamsterbor is our executive producer. Sage Bauman is our head of podcasts. If you liked this episode, make sure to subscribe and review The Big Take wherever you listen to podcasts. It
helps people find the show. Thanks so much for listening. We'll be back tomorrow