When the federal reserve began raising interest rates in 2022 – a conventional response amid broader economic pressures from government overspending and surging energy costs, I predicted that there would be many rate increases, and in revisiting the topic every few months afterwards, I predicted higher rates would last a long time.
Not to pat myself on the back (ok, I am), but I was pretty darn prophetic. That’s exactly what happened. But hopefully, the cycle is coming to an end. We recently saw our first rate cut in what feels like forever – 50 basis points was the number.
But what does the rate cut mean for the economy? Does it mean inflation has been tamed and won’t come back? Does it mean the cost of borrowing will come down? Does it mean we’ll never see another rate hike?
The answer to all of those questions is impossible to nail down. And none of them will involve a speedy resolution.
Inflation has proven sticky, and while rates of increase have slowed, the cumulative/compounding nature of this prolonged inflationary period means that price levels are now structurally and substantially higher than pre-2022 baselines. The reality is even in the best of times we have inflation. The cost of goods will still increase annually, just like they always have.
Will borrowing costs come down? Not as fast as everyone would like. While lenders’ rates typically follow the Federal Funds Rate directionally, the relationship isn’t as straightforward as many might expect. Lenders adjust more slowly, cautiously, and incrementally than the Fed. A 50 basis point Fed rate cut doesn’t mean an immediate equal reduction in lending rates. With the higher default rates across lending sectors in 2024, lenders will likely reduce rates more slowly than Fed cuts as they weigh multiple factors beyond the Fed’s actions. Borrowers shouldn’t expect quick or one-to-one reductions in lending rates following Fed cuts.
Will there ever be another rate hike? History suggests it’s virtually certain. While the timing is unpredictable, our economic cycles have always involved periods of rising and falling interest rates.
So what do these rate cuts mean for you? The immediate impact may be smaller than you hoped, but if you need equipment now or eyeing a great deal, go get it. Current lending rates are likely to be around for a while, and prices will still go up. Waiting always costs you.