Kamala Harris, Homeowners Brace for Interest Rate Decision

The Federal Reserve is set to lower interest rates for the first time in four years on Wednesday.

The Federal Open Market Committee is widely expected to announce a change in the federal funds rate, which is currently 5.25 percent to 5.50 percent, on Wednesday, September 18. The Fed rate is the interest rate that U.S. banks pay each other to borrow or loan money, and it also affects interest rates on everyday consumer products like credit cards and mortgages.

The interest rate remained stagnant at 0 percent for two years during the 2020 to 2021 peak of the coronavirus pandemic but began to increase in March 2022 as the Federal Reserve sought to address rising inflation. However, this upward trend came to a halt eighteen months later. Since July 2023, the Fed has implemented eight pauses in rate hikes.

Since runaway inflation has impacted the finances of Americans in recent years, a cut to interest rates has been highly anticipated—but exactly how much of a cut there will be remains to be seen. Some experts expect a 25-point cut (0.25 percent) while others are predicting a more aggressive 50-point slash to interest rates.

The Housing Market

A prospective cut to interest rates will be at the very least a small boon for America’s sluggish housing market, experts have told Newsweek. While the Fed does not specifically set mortgage rates offered by lenders, banks have already begun cutting rates in anticipation of Wednesday’s announcement.

Stephen Cates, former wealth management advisor and principal financial analyst for RetireGuide.com, told Newsweek a rate cut could lead to a “groundswell of interest in both new and existing home purchases,” particularly if rates fall even further in the coming months.

“Existing homeowners are in a great position already; it is new buyers who are now expecting relief. Roughly 88 percent of homeowners have a rate below six percent already,” he said. “Rates have been falling since the rate cut expectation rose in August, and this will make home shoppers more likely to emerge from their hibernation.”

Mike Pappas, CEO at The Keyes Company, an independent brokerage in Florida, told Newsweek that while a lower Fed rate leads to cheaper borrowing, its relationship to home prices isn’t always direct.

“In general, lower rates encourage buying which can lead to upward pressure on prices due to increased competition. That said, home prices are also influenced by housing inventory, overall economic stability, local market conditions, and inventory,” he said.

A combination of low housing supply due to population growth that has outpaced the construction of new homes has also impacted prices. When coupled with comparatively low borrowing rates in recent decades, it has “created a situation where more than 86 percent of homes with a mortgage have an interest rate below 6 percent,” according to Pappas.

“Seventy-five percent have a rate below 5 percent, and 50 percent have a rate below 4 percent,” Pappas said, adding that it is unlikely that many homeowners will remain “hesitant to sell because they don’t want to give up these favorable rates.”

Following Wednesday’s announcement, homeowners could see their mortgage rates cut even further, Javier Palomarez, founder and CEO of the United States Hispanic Business Council, told Newsweek.

“Mortgage rates have already dropped over 1 percent since this time last year, and these predicted rate cuts have been priced in already. This saves people an average of over $500 a month on payments,” he said.

A smaller 0.25 percent is unlikely to bring mortgage rates much lower, Palomarez said, “but if we see an even higher cut than 50 basis points, I would expect mortgage rates to fall even further.”

A rate cut is unlikely to impact homeowners much, despite reducing monthly payments, he said.

“Right now, consumer debt is surging at unprecedented levels, missed payments are becoming widespread, and the cost of basic needs is consuming entire paychecks. While a rate cut may help create a sense of economic improvement and improve housing costs, it will not address the root causes of our current financial challenges,” Palomarez said.

A Boost For Harris?

With the presidential election less than two months away, a drop in interest rates could be good news for the Democratic nominee, Vice President Kamala Harris. While the Fed is independent of the government’s executive branch, the strength of the economy is a key issue for voters this November.

“For whatever reason, there has been a disconnect in recent months between how well the economy is actually doing and how well voters think it is doing,” Andra Ghent, professor of finance and Ivory-Boyer chair in real estate at the University of Utah’s David Eccles School of Business, told Newsweek.

“This disconnect is really puzzling to economists. Maybe a 50 basis point rate cut, or the Fed indicating that it has changed its outlook on the economy—that would signal more future rate cuts or that it will cut rates at a faster pace—would help Harris because it might bring voters’ perceptions of the strength of the economy in line with its actual strength.”

But given that the Fed is independent of the White House and other legislative powers, an interest rate cut could have minimal impact on boosting Harris’s election chances, experts have said.

Matt Willer, managing director at Phoenix Capital Group Holdings, LLC, told Newsweek that a drop in interest rates “won’t be terribly popular with that retiree and savings crowd, but I’m not convinced that the average American correlates interest rates and political elections.”

“The longer-term impact is beneficial to the general public with lower borrowing costs, but that will be tepid traction between now and November,” he explained. “I put little weight into the political influence of the timing and its impact on voters. What may have a greater impact on voters is the underlying cause of the inflationary situation that led to the rise in interest rates.”