Economic Perspective: Impact of the Rate Cut on Consumers

MARY WALDEN:

“Today’s program looks at the impact of the rate cut on consumers. Mike, the Federal Reserve recently reduced its key interest rate by a quarter of a percentage point. This will make borrowing money cheaper, especially for consumers, but will all consumers necessarily benefit?”

MIKE WALDEN:

“Well it really depends upon which side of the money equation you’re on. If you’re on the borrowing side, that is if you are a household, particularly a young household, and you’re borrowing money for example to buy a house, or you’re using your credit card a lot, or your buying an automobile, a vehicle, you will probably benefit from this because all interest rates, not just the variable interest rate but fixed interest rate will be edging down. So if you’re a borrower this is a good time to borrow money. Obviously you want to make sure that those payments fit into your budget.”

“If you’re on the other side of the equation though, and you’re an investor, and typically those tend to be middle-aged and older households, and specifically in your investment portfolio you have a lot of focus on safety which means that you’re putting money into treasury securities, long-term bonds, et cetera, you’re probably going to be hurt by this because the interest rate on those kind of investments will be going down.”

“Now one thing you can do is to get with a professional, and say, ‘How can I diversify my portfolio?’ For example, maybe put more money into the stock market to counterbalance. The stock market should benefit long term from these lower interest rates, but of course there are other things going on in the economy like trade tensions which are right now affecting the stock market. I think a big sector in our economy that should benefit from this overall will be the housing sector, and that’s been lagging. This should boost the housing sector.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in
the Department of Agricultural and Resource Economics at North Carolina State University who
teaches and writes on personal finance, economic outlook and public policy.