Even if Fed cuts rates again, US economy may not get much of a boost

Federal Reserve officials are poised to cut interest rates again next week, but any benefit to the economy is likely to take much longer to show up than normal and may be blunted by factors that monetary policy can’t control.

Rate-sensitive industries, like housing, could see a limited benefit from lower borrowing costs because home prices remain near record highs and Americans are worried about the labor market. Other sectors, like manufacturing, have held back investments due to President Donald Trump’s ever-changing tariffs, something lower rates would do little to help.

With those overhangs, the typical timeline for Fed policy to start impacting consumers and businesses broadly — which can stretch up to 18 months — may not apply in the current economy.

“Companies have really paused hiring not so much because interest rates are high, but mostly they’ve pulled back because of uncertainty about the impact of tariffs and other changes in economic policy,” said Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co. “And so if that uncertainty persisted at a very high level, that could make the lag longer and feed-through to the economy longer.”

When the Fed adjusts its benchmark rate, financial markets react accordingly. But often, the central bank’s moves are telegraphed well in advance, so investors’ expectations are usually already reflected in stock and bond prices before officials act. That has a more immediate effect on new loans taken out for things like cars and mortgages, while outstanding consumer and business debt — which is typically at a fixed rate — takes longer to respond.

Rates on auto loans, mortgages, student loans and credit cards were among the first to jump when the Fed started raising rates in 2022. But they haven’t fallen as much on the way down. That’s compounded an affordability crisis for buying a car or a house, as those prices are out of reach for many Americans.

The contract rate on a 30-year fixed mortgage hit the lowest level in a year in October, giving a boost to home sales and an index of contract signings, according to the National Association of Realtors. And as more inventory has come on the market, home prices aren’t growing as fast as they used to.

Still, many potential homebuyers remain hesitant to jump in as uncertainty hangs over the economy, said Michael Fratantoni, chief economist at the Mortgage Bankers Association. Americans are feeling anxious about their job prospects and personal finances, especially with tariffs keeping prices for certain goods elevated.

“The overall state of consumer sentiment is really important for the homebuying market,” Fratantoni said. “So now, even though you have relatively low rates and more homes available to buy, you’re just seeing caution.”

While Fed policy is one factor that affects government bonds, others like inflation expectations and federal budget deficits also play a role. That’s part of why Treasury yields — and therefore other borrowing costs — are still quite high. MBA’s own forecast doesn’t see mortgage rates moving much in the next two years.

Challenging Task

Fed officials are trying to balance their two goals, which are currently in tension. Supporting the labor market calls for lower interest rates, while taming inflation should keep them higher. While investors are largely betting on another cut next week, policymakers are deeply divided. Those divisions could deepen with Trump set to announce a successor to Chair Jerome Powell, whose term expires in May.

The Fed has cut interest rates by 1.5 percentage points from last year’s peak, which has so far helped wealthier Americans much more than their lower-income counterparts. Richer households have benefited from a massive rally in the stock market in that time, boosting retirement savings and their propensity to spend, while more lower- and middle-income consumers are falling behind on debt payments for cars and student loans.

From his perch in Wisconsin, Christopher Drees has welcomed rate cuts. The company he heads, Menasha Corporation, supplies packaging solutions to a range of customers from large consumer-packaged goods and industrial companies to major auto manufacturers.

While Drees is hopeful rate cuts will benefit some of his customers by making car loans and other borrowing more affordable, the issue of tariff uncertainty remains — particularly as a key challenge at the Supreme Court could see dozens of them undone.

“It’s not ‘do we have tariffs or not?,’ Drees said. “It’s just that clarity on the rates and the clarity on tariffs across the board will create a little bit more confidence in our customers to be willing to invest more in their businesses.”

US manufacturers broadly have been in a slump this year, with factory activity shrinking for nine straight months, according to the Institute for Supply Management. Capital expenditures have largely been on hold, despite cheaper borrowing costs and business-friendly tax provisions.

“Business people, of course, are interested in a lower cost of capital,” said Susan Spence, chair of ISM’s manufacturing survey. But with tariffs, “you’ve got this other thing overshadowing all of it.”

A respondent to ISM’s September survey put it more bluntly: lower interest rates “will not impact our business.”

“All capital projects are on hold until there is some level of certainty and customers start to place orders for new equipment again,” the respondent said.