Is the Federal Reserve attempting to bail out the Biden-Harris administration with this interest rate cut? And even if they are, is this too little, too late?

Over the last three years, the American people have watched this administration pump money into the economy like it was going out of style. As a result, we saw record-setting inflation. In an attempt to bring down inflation, the Federal Reserve raised the interest rates eleven times from March 2022 to June 2023. However, the actual price of goods did not come down, and higher interest rates have made other transactions – like buying a home – more expensive.

Higher rates have been tough on borrowers, with the rate on the 30-year fixed mortgage rising to 6.12% as of the week of Sept. 13, according to Mortgage News Daily. That is up from 4.29% during the week of March 11, 2022, just prior to the Fed kicking off its first hike.

Home equity loans have also become more expensive, with rates rising to 8.49% as of last week, compared to 5.96% back in March 2022, according to Bankrate. Credit card interest rates have also jumped more than 400 basis points since the Fed started its rate increases, rising to 20.78% as of last week, Bankrate found. One basis point is equal to one one-hundredth of one percent.

Even with a Federal Reserve rate cut, the housing market is not exactly going to take off, though it might stimulate those who are ready to buy. The problem NOW is that with inflation baked into the proverbial cake in the cost of say, groceries, people do not feel that they have enough money to go forward with buying a home.

Residential real estate has been in a rut. High rates, low inventory of available homes, and soaring prices have created significant barriers to purchasing a home — especially for first-time buyers.

“The upcoming Fed rate cuts are helpful, but not a panacea for the housing market,” said Chip Hughey, the managing director of fixed income at Truist.

The Fed reacted to Covid-19 by cutting rates to historic lows, driving down mortgage rates. But unlike previous recessions, consumers emerged from the pandemic flush with cash and ready to spend. That combination was rocket fuel for the housing market.

When rates started to climb, home sales ground to a standstill. The average 30-year fixed rate mortgage peaked above 7.75 percent in the fall of 2023 — the highest in more than two decades — which kept buyers out of the market. Existing home sales fell to generational lows.

Those declines did not lead to a deep reduction in prices, however. What’s more, many homeowners who locked in mortgages at low fixed rates have little incentive to sell: Why pay 6.5 percent on a 30-year mortgage when you’re currently paying 3 percent?

This is a universal issue – I would bet that everyone knows someone, or is someone, who either can’t get a home sold without slashing the price, or can’t afford to buy a home now. Will the market now pick up the pace with this rate cut?

With both the jobs picture and inflation softening, the central bank’s Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point, or 50 basis points, affirming market expectations that had recently shifted from an outlook for a cut half that size.

Outside of the emergency rate cuts during Covid, the last time the FOMC cut by half a point was in 2008 during the global financial crisis.

The decision lowers the federal funds rate to a range between 4.75%-5%. While the rate sets short-term borrowing costs for banks, it spills over into multiple consumer products such as mortgages, auto loans and credit cards.

The rate cut is a gamble either way, and one of this size might not be the positive signal everyone was looking for.

Investors should watch what they wish for, according to Aditya Bhave, senior U.S. economist at Bank of America. The firm anticipates a 25 basis point cut on Wednesday, warning that a 50 basis point cut could ultimately be a worrisome sign.

“Risk assets might initially rally on the back of this dovish surprise,” Bhave wrote Wednesday. “But we’d caution investors that the act of cutting by 50bp means the Fed is less confident about a soft landing.”

The relief from the cut will not be instantaneous – these effects will take time to “trickle down” (heh).

Democratic strategists with close ties to Harris’s campaign gave blunter, more political answers to how a rate cut would affect the election.

“I’ve been saying this for years. The Biden-Harris economic agenda is working, but it takes time to feel the effects,” one strategist explained.

“It just makes it that much easier to pitch the vice president’s economic agenda to voters, especially when the other side is focusing on cutting taxes for the superrich and raising costs even more for everyday American households,” a second strategist added.

Funny how we’ve now been told for years that “Bidenomics is working” but it just takes a while to “feel the effects.” Yeah, we “felt the effects” all right – which is why there’s a rate cut happening now. Will it be enough to give the Harris campaign some new talking points for her to add into her current script? I hope so, because it’s very weird for Kamala Harris to keep answering questions about the economy by instantly saying how she “grew up in the middle class.”

My favorite thing about Kamala Harris's rehearsed "I grew up a middle class kid" script is she uses it when she's asked how she's going to lower costs

And her actual answer she's word-salading towards is "I'm going to spend more money." pic.twitter.com/6W88hQpgYh

— Matt Whitlock (@mattdizwhitlock) September 17, 2024

Everyone should expect that Kamala will now have a few new stock lines memorized, like “soft landing,” and “the inflation crisis is over,” and “this is the start of what I call ‘building an opportunity economy.'” The spin will likely be positive, and result in some bounce for the current administration – which I’m sure that Kamala Harris will be surprised to learn that she is ACTUALLY a part of. However, if people think that there will be price drops instantly, they will be deeply disappointed. If the jobs outlook stays soft – something which the Federal Reserve is admitting may happen, as they adjusted the expected unemployment rate from 4% to 4.4% – then the bounce may be short lived. After all, what’s the point of a rate cut if you have no job that would enable you to buy a home or pay down credit card debt?

We’re all about to find out if a “soft landing” is even possible, or if we’re now heading into a recession period that neither party will be able to spin away.

Featured image via geralt on Pixabay, cropped, Pixabay license