When the Federal Reserve lowered interest rates by 50 basis points in September, it was the first cut since the early days of the COVID pandemic. In the October 10 episode of the Market Pulse podcast, the risk advisory team discussed how this will impact both consumers and lenders. Our discussion highlighted the rate cut’s effect on consumer confidence, credit markets, household spending, and more, providing listeners with essential insights on what to expect in the coming months.

Navigating Economic Uncertainty

The U.S. economy has been dealing with inflation and high interest rates for nearly two years, prompting the Fed’s decision to lower rates. The goal of the rate cuts is to reduce financial pressures on households and businesses without risking the stability of the economy. 

My guests included Equifax Risk Advisor experts Jesse Hardin, Tom O’Neill, Tom Aliff, and Maria Urtubey. They each offered their take on how the rate cut would influence key areas like consumer sentiment, lending, housing, and more.

Consumer Sentiment and Spending

Consumer confidence, which has been shaky in recent months, was a key focus of the episode. Maria Urtubey provided insight into how the rate cut is likely to influence consumer sentiment. She pointed out that the Conference Board’s Consumer Confidence Index, which dropped from 105.6 in August to 98.7 in September, reflects growing uncertainty.

"This index is produced monthly and measures how optimistic or pessimistic consumers are about the overall economy," she explained. "The drop we experienced indicates a significant decline in consumer confidence, attributed to concerns about the labor market and job security."

While the rate cut may reduce some financial burdens, Urtubey cautioned that it might not be enough to encourage large-scale spending immediately. "Even with the rate cuts, consumers may hold back on major financial decisions," she added, noting that concerns about inflation and job security could continue to weigh on households.

Effects on Housing and Mortgage Markets

One of the primary areas affected by the rate cut is the housing market, specifically mortgage rates and refinancing options. Tom O’Neill explained how the reduction in interest rates could provide relief for some, though its immediate impact on the housing market may be limited.

"Unlike other types of lending, mortgage rates aren’t directly tied to the rates that the Fed just cut," O’Neill noted. "In fact, the mortgage market had already priced in some expectation of rates coming down, and we’ve been seeing mortgage rates come down even before the Fed took their action recently."

However, O’Neill also emphasized that many homeowners who secured low mortgage rates in previous years may be reluctant to reenter the market unless current rates drop significantly. "A lot of homeowners who are currently locked into some very low rates…are probably going to need to see current rates come down significantly before they’re willing to give those low rates up and go back out on the market for a new home," he said.

The panel also discussed the potential for increased activity in the refinancing market, as homeowners may take advantage of lower rates to reduce monthly payments.

Credit Card Users and Household Budgets

Another critical impact of the rate cut is on credit card users, particularly those with variable-rate cards. Maria Urtubey explained how the rate cut directly affects these consumers, noting that most credit card interest rates are tied to benchmark rates like the prime rate, which closely follows the Fed’s actions.

"The primary beneficiaries of the rate cut among credit card users are those who carry high balances, particularly those with variable-rate credit cards," she said. This is good news for households looking to lower their debt payments, though Urtubey pointed out that consumers with fixed-rate cards or those who pay off their balances in full each month won’t see much direct benefit.

Additionally, Urtubey warned that while borrowers might feel some relief from lower debt costs, savers could see reduced returns on interest-bearing products like savings accounts and CDs. "Lower rates will shrink returns for households that rely on interest from savings accounts," she explained.

Lending Standards and Financial Institutions

Tom O’Neill discussed how the rate cut would impact financial institutions and their lending strategies. While lower rates typically encourage lending, O’Neill noted that the response from banks and credit unions will vary based on their specific risk appetites and growth strategies.

"In periods of change…different lenders are going to take different approaches on how they handle that change," he said. "They may differ based upon the consumer segments they focus on, the local markets they compete in, and the different lending products they offer."

O’Neill also highlighted that while institutions may be quick to lower rates on deposit products like savings accounts and CDs, they might be slower to reduce interest rates on loans, especially in competitive markets where maintaining strong reserves is essential.

The Bigger Picture: Federal Deficit and Global Conflicts

Toward the end of the episode, Jesse Hardin addressed broader economic issues, including the growing federal deficit and ongoing global conflicts. He warned that while the rate cut may provide short-term relief, it doesn’t solve long-term fiscal challenges.

"In the fiscal year of 2024, we’re going to spend more on interest payments on government debt than we will on defense spending," Hardin explained, emphasizing the severity of the U.S. government’s debt situation.

Hardin also discussed the potential impact of global conflicts, particularly in the Middle East, on the U.S. economy. Rising oil prices, in particular, could undo some of the benefits of the rate cut, as higher fuel costs strain both households and businesses. "We’re watching what happens with oil prices,” he said. “If we get into the $4 range, we really start to see pressure.”

A Mixed Outlook

The episode wrapped up with the panelists acknowledging the complexity of the economic situation. While the Fed’s rate cut offers some much-needed relief, it’s not a panacea for all the economy’s challenges. As Tom O’Neill summarized, "This is going to be a longer-term impact, and the changes in rates are only one factor in those market dynamics."

For businesses, lenders, and households alike, the message was clear: stay informed and be prepared for a dynamic and evolving economic environment. As always, Equifax's Market Pulse Podcast will continue to provide valuable insights to help navigate these uncertain times.

For more insights or to reach the Equifax Risk Advisors team, email them at Riskadvisors@equifax.com.

*The opinions, estimates, and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.