Experts: Interest rate cuts could heat up local economy

A cut by the Federal Reserve of the benchmark interest rate, expected by many in the coming weeks, could spur economic growth both nationally and in the Valley, experts say.

Over the past month, the Fed has offered clues that a rate cut is likely, a reduction from its current 23-year high. On Friday, Fed chairman Jerome Powell said "The time has come for policy to adjust," noting that the timing and size of cuts will likely be determined by data and risk analysis in the coming weeks.

In Friday's speech, Powell stressed that inflation, after the worst price spike in four decades inflicted pain on millions of households, appears largely under control. According to the Fed's preferred measure, inflation fell to 2.5% last month, far below its peak of 7.1% two years ago and only slightly above the central bank's 2% target level.

The next call is in mid-September. A drop in key interest rates at that time could impact everything from inflation to employment, along with the housing market, construction and the stock market.

"A potential Federal Reserve interest rate cut could benefit Danville's real estate market by making mortgages more affordable, increasing buyer demand, and potentially raising property values," Rebecca Dressler, Danville Business Alliance executive director and Montour County commissioner, said. "Sellers might see quicker sales and higher prices. For construction, lower rates could reduce borrowing costs, leading to more investment and job creation in local projects."

Aimee Buehner, associate broker, Bowen Agency Realtors added that "Any rate change would typically affect the market.

"If rates come down, I would anticipate an influx of buyers," she said. "The market is still short of inventory, so it could further increase competition for buyers in an already tight market."

Holding steadyMatthew Rousu, dean of Susquehanna University's Sigmund Weis School of Business, said a rate cut would impact the cost of borrowing, which would have a downstream impact. He noted that an immediate impact may remain elusive.

"The overall impact takes some time," Rousu said. "And what is tricky about what the Fed does with interest rates is you are often not quite certain where you are as an economy and when the right time to cut rates is."

The Federal Reserve defended not cutting rates in its July call. Federal Reserve board members are elected in 14-year terms, so they can be politically immune to day-to-day discussions. Political timing should have nothing to do with their decisions.

"They look at the data. I believe them, but in today's political climate every action done that affects the economy will be viewed by some people as political," Rousu said. "The Fed has a dual mandate: to keep inflation low and to try to keep unemployment rates low as well."

Investments would go upIn his remarks on Friday, Powell said the Fed has grown concerned about slower hiring and a rising unemployment rate, even while it still wants to see inflation fall further. That dual focus is replacing the Fed's previous singular focus on inflation.

"The cooling in labor market conditions is unmistakable," the Fed chair said. "Job gains remain solid but have slowed this year. ... We do not seek or welcome further cooling in labor market conditions."

Rousu explained that if interest rates are lower, Americans could expect firm investments to go up.

"Firms would be more likely to invest in machinery, utilities, and anything to grow their business. The lower the interest rate is, the cheaper it is to borrow money," Rousu said. "The rate of return a firm needs is lower and they can take more risks by borrowing money to invest. That should, in time, cause the unemployment rate to drop.

Nothing is going to happen with the snap of a finger, Union County Commissioner Jeff Reber warned. "If interest rates are dropped in September I wouldn't expect the unemployment rate to drop in September. It is going to lag by several months.

"More people will buy homes if interest rates make home-buying more affordable. All of this will have an impact. The question is the timing of when it will have an impact. There is no instantaneous impact."

At risk: The Return of InflationThe biggest risk is the inflation rate, Rousu said, and controlling that is one of the Fed's key roles.

"We just went through the highest inflation in the U.S. since the 1970s and part of the increases in the interest rate that the Federal Reserve put into place was to slow down the money supply and cause inflation to cool down," he said.

The rate is down from its high, but it is still higher than where it had been previous to the pandemic, Rousu said.

"Inflation is hovering around 3 percent," he said. "Before 2020 we had not had inflation rates over 3 percent since 2011. So this inflation number is higher than the Federal Reserve would like."

Bucknell economics professor Matias Vernengo said he doesn't see any significant risk if the U.S. lowers the rate.

"Inflation is very close to the target, 3 percent — arguably a reasonable target. The items that are pushing it up, like energy, are not affected by a reduction in interest, or shelter, which is pushed up by higher rates," he said. "So even for inflation, a lower rate might bring down rents and be a factor for stabilization. This would allow Powell and the Fed to reduce interest rates without being seen as partisan trying to favor the incumbents."

Lowering the rates will affect consumer spending and borrowing, Vernengo said.

"It might revive the housing market in parts where it has been slow, allowing people who were waiting for rates to fall to borrow, and will certainly ease some of the pressure on borrowers overall. Mind you, the effects here also work out with a significant lag. However, here is probably the stronger case for the reduction. Not so much to a recession that might not be coming, or at least not immediately, but to make private debt less costly."

The Associated Press contributed to this story.