- The Federal Reserve announced a half-percent interest rate decrease, the first cut in about four years.
- The larger than expected, half-percent cut, however, may indicate more concern among the Fed on labor market softening.
- The interest rate decrease reflects generally stable economic conditions and cooling inflation.
- Businesses may not see significant or immediate changes with this decrease, though subsequent, continued decreases could benefit durable goods industries like automotive and mobility and real estate.
Business Impact of Federal Reserve Interest Rate Cut
September 18, 2024
Key Takeaways
Amid Generally Stable Economy, Fed Makes Higher Than Expected Cut to Interest Rates
The Federal Reserve today announced the move to decrease the federal funds rate by half a percentage point at the September Federal Open Market Committee (FOMC). After raising the rate 11 times between March 2022 and July 2023 with the aim to cool inflation, the rate has remained at 5.25-5.5% since then. It is worth noting that increases following a prolonged period of exceptionally low rates are not historically unusual.
This decrease is higher than expected, indicating the Fed may see a more serious slowing in economic conditions. Despite this, key economic indicators remain fundamentally solid as GDP has held strong through 2024 with a solid 3% annual growth in Q2 and unemployment remains a solid 4.3% nationally.
With the dual mandate of price stability and maximizing employment, the Federal Reserve has seen improvement as the 12-month inflation rate in August was 2.5% – the lowest level since early 2021. Though the latest employment levels show cooling, the economy’s stability over the past 18 months speaks to the progress made in navigating this economic environment.
“This long-anticipated interest rate decrease reflects the stability the economy has experienced, and the Federal Reserve Bank’s drive to a ‘soft landing’ after experiencing recent highs of inflation. While a half-percent decrease will not have a major or immediate impact on businesses or consumers, if continued, subsequent decreases will make durable goods and investments less costly, including automobiles and homes. In my view, this action by the Fed indicates both the strength of our economy’s condition and the success of the Federal Reserve Bank engineering a ‘soft landing’ for our economy during a challenging time.”
– Sandy K. Baruah, President and Chief Executive Officer, Detroit Regional Chamber; Former Board member, Chicago-Detroit Federal Reserve Bank
The Fed has flexibility moving into the final quarter of 2024, with three more opportunities to determine the frequency and size of additional interest rate cuts.
Detroit Region’s Businesses Stand to Benefit as Interest Rates Decrease
This initial cut will not make a fundamental difference immediately to the average business or consumer. In Michigan’s capital-intensive businesses like automotive, appliances, and furniture companies, will benefit from lower interest rates. Real estate across the nation will benefit too as the cost of buying and financing will provide consumers more buying power.
Despite Stability, Perception-Reality Disconnects Around the Economy Persist Among Michigan Voters
Although this interest rate decrease can be viewed as a positive update, challenges remain, as the most recent Detroit Regional Chamber Michigan Voter Poll shows Michigan voters continue to believe the state’s economy is on the wrong track. Sixty-one percent of respondents see the economy weakening or in a recession, yet nearly the same number of respondents share they are doing better or the same economically as before the pandemic.
Further, as Michigan’s unemployment rate of 4.4% nearly matches the nation, and despite sour perspectives on the economy overall, voters indicate confidence in their employment. Eighty-five percent of voters are not concerned about losing their jobs and nearly the same number report they have not had trouble finding a good-paying job (75%). Job openings remain strong, but down substantially from the peaks of 2022.
Learn more about this update and other key economic indicators at detroitchamber.com.