The Federal Reserve yesterday cut interest rates by half a percent. It was the first rate cut in four years, and likely won’t be the last this year. Even though the Fed had signaled they were planning to cut the rate, many observers were caught off guard a bit by its size.
Jim Rounds, president of Rounds Consulting Group, joined The Show to talk about how the lower interest rate may impact Arizona.
Full conversation
JIM ROUNDS: Well, there, there's two things to think about. One is what is the impact of a half a percent reduction in the rate, and everybody was expecting a quarter percent, they call it a quarter point, but most people think of it in percent terms.
Well, because the markets already adjusted for what they were thinking, they thought it was going to be a quarter percent and then it, then they decided to reduce it by half a percent. It meant that it caught some people off guard and they haven't already done some planning for that yet.
So it's still going to have a little bit of an impact. Now it's going to reduce mortgage rates. It's going to reduce the cost of borrowing. And what that does is it makes it less costly when you want to borrow to get a car or your credit card payments. Things like that.
The problem though is they kept rates zero for so long, raised it really quickly to a really high level, that coming down by half a percent isn't going to have as big of an impact on the economy as you would normally see. It has to come down quite a bit further.
But they did something that was very different than before. And I don't know if you remember the Greenspan days, where there's always jokes about if he rubbed his left ear, it meant that they were going to reduce things by a quarter. There were all these weird like conspiracy theories and signals, but he actually did a good job signaling.
This Federal Reserve Board did a terrible job of signaling and then they come out yesterday and they say we're not just reducing rates by half a percent at this meeting. We're looking to reduce it by a whole percent by the end of this calendar year. And then they're looking to reduce it by another full percent the next year and then maybe another half a percent. So they just went from being very conservative with reducing rates to being probably overly aggressive.
Now, when you have that happen, that's when people that are, I say stuck, but they're very fortunate. A lot of people got mortgage rates around 3%, 3.5%. They can't move because why would they move and give up that, you know, favorable interest rate? Well, when the interest rate comes down, you're going to see more of those people with a low mortgage rates decide to, maybe it's time to move up into a more expensive home.
That then opens up a lower price home for somebody else. And so you end up with housing prices declining. But it's not even that simple because as the economy gets picked up a little bit by these reduced rates, housing prices are gonna go up, but the mortgage rates are going to go down. And the mortgage rates are going to go down by more than the housing prices are gonna go up. So it'll net benefit the housing market, but it's gonna take a while.
MARK BRODIE: So I wanted to ask you about housing because for the longest time, as you alluded to, we've been hearing about how there just isn't really much of a supply of existing homes because people who are living in them don't want to sell because they're not going to get an interest rate as good as what they have now. It sounds like what you're saying is this might sort of unstick some of that supply which maybe in theory could help perhaps new homebuyers or people looking to get into the market.
ROUNDS: It'll unstick some of the supply. But we're, we're further challenged when, when you have the current economic conditions, there's a combination of current economic conditions to some extent, the extent that government restricts development or maybe has too high development fees. There's a lot of things the government does on the like the zoning side and there's a lot of stuff that they do on this macro side, like what the Federal Reserve Board does. So a lot of things led to what is going on with housing right now.
So with people being able to move up out of their 3%, 3.5% mortgage rates into something else in the next couple of years, you will have additional homes freed up for people that maybe are in that lower to middle income area. But the lower income housing always needs to be subsidized or you need major changes in the way restrictions are applied to homes on smaller lots and things like that.
BRODIE: You mentioned that this will make it less expensive to borrow money. So, are you anticipating that people who have been putting off larger purchases might be inclined to, to make them now?
ROUNDS: Well, they might, but it, I think it's going to end up being, rather than seeing this cause a little bit of an economic boom, it's gonna be lessening the decline of the economy. See, we're, we're really at the tail end of this thing and, and one of the best measures as you take a look at the U.S. jobs report, every, that comes out every month. Where, you know, normally you would like to see job growth 200,000 to 300,000, maybe more. As you get closer to 100,000 a month, you get into that kind of sketchy territory. Well, we actually went below that one month and we've been close to 100,000 within the last three months.
So we have this trend of job growth going down. We have inflation going down, which would normally be a positive. But in this economic environment, prices have gotten so high, unless inflation goes negative, we're not going to see overall price declines. People don't care about the inflation percentage, they care about how much things cost.
All this is really going to do is it's not going to be boosting things. It will for somebody that's been in the market for maybe getting a new car or even a used car concerned about the interest rates being too high, they'll see a little bit of relief, but we're not going to see just an economic boom. This is really to stabilize the decline.
But what, what they're doing differently is they're being extremely aggressive, which makes my previous prediction of this being a very mild downturn for the U.S. and for Arizona in particular even more likely. And so even though I think the Federal Reserve Board messed up greatly, by the way they managed the period after COVID, keeping, keeping … rates too low for too long and then raising them so rapidly that gives them a little bit more ammunition to fight against a severe economic downturn.
BRODIE: Interesting. Well, so you mentioned inflation that of course, has been on the minds of a lot of people around the country and around Arizona. Do you anticipate that this rate cut will have a significant impact on inflation? Like to the point where people will notice things being different.
ROUNDS: I think it'll, it, they'll notice it in the report. So when they hear that inflation maybe went up a little bit from closer to 2% to 3% because this will push inflation up a little bit. They'll at least hear that. You don't notice those smaller changes every day at the grocery store or when you're buying a television or whatever else it is. But what you do notice is that you have to have inflation in negative values in order for prices to come down.
So people are still going to be noticing that they're paying a lot more for everyday items even though people are saying, but inflation is in check. This will cause inflation to go up, but it will also make it where the job numbers that are declined, that are falling below 100,000, which is my worry point. It might push those up a little bit.
And again, the target is a soft landing, the planes coming down towards the runway. Do you want it to slam into the runway or do you want it to, like, gradually drift into it? And that's what they're trying to do.
But I still don't understand why they decide to tell everybody we're going to be cutting rates like crazy for the rest of this year, all of next year and then half of the year after that, they don't know. I mean, that's, that's, that's like Greenspan tugging on his ear, scratching his nose, you know, taking off his jacket, putting it back on it. That, that just, this normally doesn't happen and it's a little bit amateurish, but it's also consistent with what they've been doing since, since this COVID recession issue.
