Fed poised to cut interest rates, but will it matter to Virginia voters?

At long last, the Federal Reserve Board appears poised to cut interest rates in September for the first time since it began its war against inflation almost two and a half years ago.

But will it matter when Virginia home buyers and other consumers vote in elections for the presidency and Congress less than two months later?

The answer might depend on whether they base their vote on how they act or how they feel.

"People are worried, but they're still spending," said Alice Louise Kassens, an economics professor and senior analyst at the Roanoke College Institute for Policy and Opinion Research.

Consumer behavior is not the same as consumer sentiment, as the Federal Reserve Board weighs a decision on whether to reduce the federal funding rate. It has left the rate unchanged at 5.25% to 5.5% for the past year in an effort to lower the rate of inflation without triggering a job-killing recession, which many have predicted but has yet to come. Currently, the federal funding rate for overnight lending among banks is about 5.3%.

Inflation has come down to 3%, based on the Consumer Price Index over the past 12 months, after peaking above 9 percent more than two years ago. The Gross Domestic Product increased by 2.8% in the last quarter. Unemployment ticked up to 4.1% nationally, a sign that the economy is cooling as the Fed had hoped in its push to lower prices. The stock market is booming year to date, despite recent volatility.

But analysts said those positive signs don't necessarily make people feel better because they still feel the cumulative effects of inflation on the prices they pay at the grocery store, gasoline station and the checks they write each month to their mortgage company or landlord.

"Those prices are already there, and they're not going down," said Kent Engelke, chief economic strategist and managing director at Capitol Securities Management Inc. in Richmond.

The stock market already has assumed a quarter-percent rate cut into its pricing decisions, Engelke said. He doubts that a rate cut — or potentially a series of cuts through the end of the year — would have any effect on the election or provide immediate relief to consumers.

But he also thinks the Fed would be unwise to hold off on cutting rates until inflation falls to its target of 2% because of "the pain" inflicted to get there.

"The cure to get to 2% is worse than the disease," Engelke said.

Consumers wary

Consumer sentiment remains wary, according to the latest survey by the University of Michigan. Consumer confidence declined slightly from June to July, but remained statistically unchanged for the past three months, according to the survey released on July 26. Sentiment has risen 33% under the index since inflation peaked in June 2022, but the survey said, "consumer attitudes toward the economy are guarded as high prices remain a drag for consumers, particularly for those with lower incomes."

In Virginia, researchers at Roanoke College are about to conduct field surveys across the state to gauge consumer confidence for the institute's quarterly report later this month. Consumer sentiment and expectations rose sharply in the first quarter of the year for the first time since the COVID-19 pandemic began four years earlier, but those hopes subsided in the survey published in May.

"Consumer sentiment has reversed its long skid downward," Kassens, the research institute's senior analyst, said in an interview. "It's having trouble sustaining its upward growth."

People are traveling, based on statistics from the U.S. Transportation Safety Administration that she described as "fantastic" as air travel returned to levels in 2019, before the pandemic.

"People are spending money like crazy," Kassens said.

However, spending depends on wealth, said Joanne Hsu, director of the survey at the University of Michigan. "Continued strength in consumer spending is consistent with the fact that sentiment among wealthy and high-income consumers — those with the most purchasing power — has climbed sharply over the past two years."

"These consumers generate a disproportionate share of spending and have been supported not only by rising asset values and incomes, but also growing confidence in the economy as well," Hsu said. "In contrast, the burden of high prices continues to drag down sentiment for less wealthy consumers."

Wages have increased, although different measures come to different conclusions about whether earnings are rising faster or slower than prices.

"People are out there acting like the economy is good, but if you ask them their sentiment, their sentiment is not good," said Bob McNab, chair of the department of economics at Old Dominion University.

"People tend to say, 'I'm doing well, but my neighbor must be doing worse,'" McNab said.

Housing costs

One clear problem remains for consumers: the cost of housing. The Fed has been waiting for the inflation rate to fall to 2%. "Right now, the primary driver in keeping prices above that 2% target is housing," Kassens said.

Lowering interest rates should make home mortgages more affordable, but it's not clear how much relief a quarter-point rate cut would provide to home buyers in a seller's market.

"It's a positive step, but I don't think it's a meaningful one, in terms of meaningfully affecting the housing market," said Laura Dillard Lafayette, CEO of the Richmond Association of REALTORS. "The issue with the housing market is the lack of supply."

McNab strongly agrees, advocating for local governments to encourage residential development instead of stifling it.

"We are behind," he said. "We are significantly behind."

The effect of high housing costs is clearest in Northern Virginia. The region is losing residents, especially middle-class people who are able to work remotely, to Richmond and other parts of the state — or other states — where prices to own or rent are lower, as the University of Virginia's Weldon Cooper Center for Public Service recently documented.

"Northern Virginians are either stopping in Richmond or they're moving to Raleigh," said Lafayette, who expects the planned extension of higher speed rail service from Virginia's capital to North Carolina's capital to accelerate that trend.

The trend is driving up the cost of housing for people who already live in the Richmond area but earn less than arrivals from Northern Virginia who may be flush from selling their homes there, she said. "We welcome the Northern Virginians, but they are putting the squeeze on Richmond's wage earners."

Housing represents more than one-third of the inflation rate, depending on the index, Kassens said. "It's the largest bill I pay every month."

The Fed's call

Former President Donald Trump and some other Republicans have objected to a possible interest rate cut by the Federal Reserve less than two months before the presidential election, but Fed Chair Jerome Powell made clear last week that the board is focused on economic data, not politics, in weighing its decision.

"We're using our best thinking, we're doing our best to understand the economy, we follow academics, we follow the many commentators who bless us with their commentary, but we don't change anything in our approach to address other factors, like the political calendar," Powell said in a news conference after the board met on Wednesday.

How would a rate cut potentially affect the elections?

It shouldn't matter, said Mark Rozell, dean of the Schar School of Policy and Government at George Mason University.

"Either you want to help people or you don't, and this is what people have been begging for the last year and a half," Rozell said. "People have been pleading for interest rate cuts to stimulate the economy."

"It's not whether there is political gain for one party or the other," he said. "It's getting people the help they need."

Michael Martz(804) 649-6964 [email protected]