This is Digital, Episode 42: Inflation, Interest Rates, and the Election: What’s Next for the U.S. Economy?

Q&A

Why did the Fed decide to go with a 50-basis-point rate cut instead of a smaller 25-point cut? How will the cut impact the financial strategy of mid -size and large enterprise sector in terms of relief versus incentive to invest? 

Matt: The 50-basis-point cut, as opposed to the more conservative 25, signals that the Fed is confident inflation is no longer a pressing concern. Inflation has come down significantly compared to last year, and Chair Powell's decision reflects a commitment to make monetary policy less restrictive. There's little evidence suggesting inflation will return to its previous highs, and by opting for a larger cut, the Fed is sending a message that they're not worried about inflation surging back. It could also be seen as the Fed catching up, implying they may have delayed easing sooner.  

In terms of financial strategies for companies, I think it helps more with the existing debt. Even leading up to this meeting, we anticipated a more cautious approach. But the stronger argument for front-loading—or quickly getting policy back closer to the neutral rate—is tied to business refinancing. In the U.S., both consumers and businesses have been largely rate-insensitive over the past few years. The Fed raised interest rates dramatically, and while things have slowed down, it’s not like 1981 or 1982, where the economy contracted significantly. Much of this resilience is due to businesses and households locking in low fixed rates in 2020 and 2021. 

What impact do you expect this rate cut will have on consumer spending?

Matt: For most consumers, especially those with fixed-rate mortgages, this rate cut won’t have a direct impact. However, for those with variable debt, like credit card holders, they may see a slight reduction in interest rates, though the difference is marginal. The bigger impact could come from mortgage refinancing. Mortgage rates have been dropping faster than expected, and this could lead to more refinancing activity, freeing up cash for consumers to spend elsewhere. But for most people who locked in low rates years ago, the immediate effect is limited. 

How did the labor market influence this Fed decision?

Justin: The labor market played a significant role in the Fed's decision. During this inflation surge, the first since the 70s, people almost forgot the Fed’s dual mandate: stable prices and maximum employment. When inflation hit 9% in June 2022, the labor market was still growing, so inflation became the main concern. But as unemployment rose slightly to 4.3%, then dropped to 4.2%, the labor market came back into focus. 

Many expected rate hikes would sharply increase unemployment. The goal became lowering job openings without spiking unemployment. The Beveridge curve showed job openings could come down without a big unemployment jump, though 4.3% made people nervous. Recent data shows concerns about the labor market may be overstated, but the Fed still doesn’t want unemployment to rise much more. They're now balancing inflation and unemployment. 

We're in full swing with the Presidential Election. How is the election influencing the economy, particularly consumer versus business sentiment? How is it affecting business decisions?

Justin: The primary metrics picking up the effects of the election are sentiment surveys, like the Conference Board measure, the NFIB survey of small businesses, and various CEO surveys. Across the board, the election is regularly cited as increasing uncertainty in the economy. 

Surveys suggest that CEOs have been more hesitant to make large capital investment decisions until after the election. There are likely policy shifts coming after November, especially with Congress deciding the budget and the possibility of a new president. 

Additionally, by the end of 2025, key provisions from the 2017 Tax Cuts and Jobs Act, including personal income and business tax cuts, as well as ACA premium subsidies, are set to expire. Regardless of who wins, Congress will need to address these. Businesses are aware that significant policy changes could happen, depending on the election’s outcome, which currently looks like a toss-up. As a result, many CEOs and companies are waiting until after the election to reassess their plans for the next 6 to 12 months.