5 takeaways: Federal Reserve cuts interest rates, why you should care

The Federal Reserve cut its key interest rate by half a percentage point on Wednesday, Sept. 18. It was the first rate cut since the beginning of the COVID-19 pandemic, and the rate now stands at 4.9 percent.

And like many Oregonians, we wondered what that actually means and why anyone should care.

Here's what we found:

1. Let's start with the basics: What is the Federal Reserve?

For this, we turned to state economist Jake Procino, whose monthly analysis of the Portland metro area economy is the gold standard for clearly explaining complicated things.

"The Federal Reserve (the Fed) is the central bank of the United States," Procino told the Tribune. "It has a dual mandate to maximize employment and ensure price stability. Its main tool to do this is by changing the federal funds rate."

2. OK, well, I don't pay anywhere near 4.9 percent interest on, say, my credit cards. What does this mean to me?

Staying with Procino a moment: "Altering the federal funds rate has a knock-on effect of changing other interest rates in the market, such as for loans and mortgage rates," he told us.

Increasing the federal funds rate raises interest rates that you and I pay, and lowering the federal funds rate — which the Fed just did — lowers our interest rates. "In other words, raising the federal funds rate makes money more expensive to borrow. When interest rates are higher, businesses tend to borrow less money and spend less on capital projects, such as constructing houses," Procino said. "When interest rates are cut, it's cheaper to borrow money, so it tends to stimulate economic activity because businesses will borrow more money."

3. So why cut the rates now?

The rates had been kept high, other economists tell us, because the Fed was attempting to cool down the economy and fight inflation, which raises prices on everything from the gas in our car to the eggs in our fridge.

But over the summer months, several key economic trends, including a slowdown in jobs production nationwide, have hinted that inflation may be on the ropes.

Oregon Sen. Ron Wyden sits on the Senate Finance Committee, so he seemed like a good guy to ask about the timing of this cut.

"It's a clear sign that the Fed believes inflation is under control and it's good news that Oregonians will save on things like auto loans and mortgages as rates come down," Wyden told us.

4. Oregon faces a housing crisis. Will the Fed's move impact that?

One of the most persistent problems in Oregon is the lack of housing stock for our population, which drives up the price of both home buying and rents. Solving that problem has been at the top of the to-do list for Gov. Tina Kotek and for the Oregon Legislature for two years now. Will the Fed's move help with that problem?

We spoke to Professor Sarah Tinkler, who's been a member of the Portland State University economics faculty since 2005, and she thinks it will help.

"The effect of interest rates changes on the housing market will be particularly interesting to watch for Oregonians who are anxiously waiting for a housing market that is less tilted in favor of sellers," she told us. "High interest rates over the last few years contributed to rising house prices by constraining the supply of existing homes. Owners refrain from listing houses for sale in a high interest rate environment since a move (however desired for reasons such as relocation or family size changes) would mean abandoning a low interest rate on an existing mortgage and replacing it with a much higher interest rate on a new house."

Also, homebuilders are "interest sensitive," Professor Tinkler said. "One might predict that a significant drop in interest rates will free up existing homeowners to list houses and move, and that this will also encourage builders to build more. This is good news for first time home buyers."

We also asked Sen. Jeff Merkley of Oregon about the impact on the housing crisis. He called the rate cut "great news for folks in Oregon and across the country!"

Merkley also added, "High interest rates drive higher mortgage payments and insurance costs — this cut gives some much-needed breathing room to hardworking families."

5. Is there any downside to the Fed lowering the interest rate?

Possibly, according to Professor Tinkler of PSU.

"Oregonians are no different from other Americans in that they should see some relief from interest payments on their debts," she told us. "On the other hand, Oregonians who are retired will find it harder to earn income from safe investments such as (certificates of deposit, or CDs) since the interest earned on savings will also track down."

On the plus side, she said: Businesses may find it easier to take out loans to fund expansion.

There's a lot of speculation among Fed watchers that this is the first of perhaps several rate cuts in our near future. And perhaps surprisingly, that could mean we won't see immediate economic improvement, Tinkler added.

"Any positive effects of interest rates on stimulating demand for goods, services and assets may occur with a lag if consumers assume, probably correctly, that this is the beginning of a loosening cycle by the Fed," she said. "They may put off buying new cars, etc., in the expectation of lower future interest rates."