US Fed poised to cut rates: Can it steer economy toward soft landing?

American consumers, home buyers, and small businesses have been eagerly awaiting a key announcement from the Federal Reserve.
After months of elevated interest rates, the Fed is likely to lower its benchmark rate, potentially giving a much-needed break to the economy.
The big question on everyone’s mind: Will the rate cuts come quickly enough to prevent a recession, or will the slowdown hit before relief arrives?
Kelly Mardis, who owns Marcel Painting in Tempe, Arizona, is one of the many small business owners feeling the strain of high borrowing costs, reported news agency Associated Press (AP).
Since the Fed began hiking rates in March 2022, Mardis saw a sharp drop in customer inquiries, forcing him to lay off half of his 30 employees.
With the Fed poised to announce rate cuts, Mardis is hopeful that better times are just around the corner. Lower rates would ease borrowing costs for home buyers, spurring new sales and renovations that could reignite his business.
“I’m 100% sure it would make a difference,” he says, looking ahead optimistically, as quoted by the report in AP.
For many, the rate cuts can’t come soon enough. Businesses have struggled under high interest rates, with borrowing becoming expensive and demand slowing across several sectors. Mardis isn’t alone in wondering if the Fed will act swiftly enough to save the economy from a more serious downturn.
The Fed’s current interest rate sits at 5.3%, the highest in over two decades. While most experts expect a rate cut this week, the real question is how big it will be. Will it be a modest quarter-point cut, or could the Fed go further with a larger half-point reduction?
Economists and market watchers are divided. Some believe a more aggressive cut is necessary to jump-start economic activity, particularly in interest-sensitive sectors like housing. The housing market, in particular, has taken a hit from high mortgage rates, which peaked at nearly 7.8% earlier this year.
Encouragingly, mortgage rates have already begun to fall in anticipation of the Fed’s move. Last week, the average 30-year mortgage rate dropped to 6.2%, its lowest level in 18 months. Other key interest rates, such as those influencing auto loans and business lending, have also eased.
The Fed is aiming for a “soft landing” — the delicate balance of lowering inflation without pushing the economy into recession. But that task is proving challenging. While inflation has cooled, cracks in the economy are starting to appear. Hiring has slowed, and the unemployment rate has ticked up to 4.2%.
Fed Chair Jerome Powell has stressed that the central bank is ready to act to support the job market. However, some economists worry that waiting too long to cut rates could stall the economy even further. “The question is if it’s helping quickly enough,” says Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Many economists are calling for at least two half-point rate cuts by the end of the year to prevent the economy from slipping into a deeper slowdown, as mentioned in the report.
But the Fed must be careful not to send the wrong signal to markets. A large cut could make investors nervous, as it might suggest the Fed is more concerned about the economy’s health than it is letting on.
If the Fed manages to get inflation under control, some experts believe we could see interest rates drop as low as 3% by the end of next year. That would bring much-needed relief to consumers and businesses alike, reducing the cost of everything from mortgages to credit cards.
For homeowners, lower rates could break the current housing gridlock. Michele Raneri, head of U.S. research at TransUnion, explains that as mortgage rates fall below 6%, more homeowners will be willing to sell, freeing up inventory for first-time buyers. “We need some people to start moving to start that churn,” she says.
Brittany Hart, who owns a software consulting firm in Phoenix, is already seeing signs that the housing market might be picking up, as quoted in the report.
Her clients — mortgage brokers and banks — are preparing for a rebound in activity, and she’s looking to hire more employees to keep up with the expected demand.
As the Fed’s rate cuts begin to take effect, businesses like Hart’s and Mardis’ may finally see the relief they’ve been waiting for.
As the Fed prepares to cut interest rates, all eyes are on the pace and timing of the reductions. While there’s optimism that lower borrowing costs will give the economy a boost, uncertainty remains. The next few months will be critical in determining whether the Fed can navigate this tricky economic period without tipping the U.S. into recession.
For now, consumers and business owners alike are watching closely, hoping the Fed’s actions will provide the lift they need.