Interest rates cuts are here. What does that mean for Las Vegas?

The Federal Reserve on Wednesday cut its benchmark interest rate by an unusually large half-point, a dramatic shift after more than two years of high rates that helped tame inflation but also made borrowing painfully expensive for American consumers.

The rate cut, the Fed’s first in more than four years, reflects its new focus on bolstering the job market, which has shown clear signs of slowing.

The central bank’s action lowered its key rate to roughly 4.8 percent, down from a two-decade high of 5.3 percent, where it had stood for 14 months as it struggled to curb the worst inflation streak in four decades. Inflation has tumbled from a peak of 9.1 percent in mid-2022 to a three-year low of 2.5 percent in August, not far above the Fed’s 2 percent target.

The Fed’s policymakers also signaled that they expect to cut their key rate by an additional half-point in their final two meetings this year, in November and December. And they envision four more rate cuts in 2025 and two in 2026.

The question is, what does this mean for the average Las Vegas resident?

Matt Hennessy, a Las Vegas-based mortgage advisor, said now is a good time for people to start looking at their finances more closely, most notably big monthly financial obligations such as mortgages, car loans, credit cards and lines of credit. He said some interest rates will fall automatically Wednesday, such as credit card interest rates, so residents should see minor relief automatically.

U.S. credit card debt recently hit $1.1 trillion, its highest level in history and Hennessy said the start of cuts is a good sign for those struggling to make monthly payments.

Rate cut is welcomed

“Lowering the fed funds rate is likely to be welcomed by consumers who have significant high interest credit card debt. For example, if a consumer had a $10,000 balance on a credit card with an average 25 percent annual percentage rate, they would be spending approximately $2,500 on interest per year,” he said. “Now if the annual percentage rate was to drop a few more times and that APR was reduced to let’s say 24 percent that would equate to $100 savings per month. Overall, this is a not a huge savings for consumers but as we know every little bit helps.”

Policy analysts believe the central bank will administer multiple cuts, hoping to settle somewhere in the 3 percent range over the next few years barring an economic downturn. Hennessy said waiting until the full cycle of expected cuts could bring about a bigger savings windfall, however he said anyone looking to save money right now should be looking into what loans they can renegotiate.

The U.S. economy is expected to receive a jolt from this first ceremonial cut, but analysts are unsure if rate cuts may expose a weak economy in hiding and actually drive inflation back up.

Mortgage rates could drop

While mortgage rates are not directly set by the federal funds rate, Hennessy said they do tend to go in lockstep and they should start to drop as more rate cuts come through. He said refinancing should be considered for anyone who has taken out a mortgage in the past few years after rates shot up to stem inflation coming out of the pandemic.

Jonathan Catalano, a real estate agent with ERA Brokers Consolidated in Las Vegas, said they have yet to see the translation of mortgage rates dropping close to a percentage point and expected rate cuts to more people looking to buy homes in the valley. He also pointed to a potential wait and see approach regarding the outcome of the presidential election on Nov. 5.

“Even with the lower rates, buyers however, haven’t seemed to react. In fact, the market has become surprisingly sluggish in the last month or two with inventory at all price points struggling to get showings causing a high number of price reductions as seller push to get their homes sold,” he said.

Las Vegas real estate prices continue to rise, coming close to an all-time high set in May 2022, however Las Vegas still leads the country in terms of new listings. Catalano said only time will tell where a new rate cut cycle takes the American housing market, which many believe is overheated.

“We’ll have to wait and see how buyers react if rates dip into the fives but for right now, I think buyers have hit the brake pedals because of their uncertainty in the economy, particularly with the upcoming election,” he said. “History shows us that elections typically do not have much of an impact on housing activity but I think in this election cycle, the election results will be more of a driving factor for buyers to get off of the sidelines than lower interest rates will.”

‘Time to recalibrate’

In a statement and in a news conference with Chair Jerome Powell, the Fed came closer than it has before to declaring victory over inflation.

“We know it is time to recalibrate our (interest rate) policy to something that’s more appropriate given the progress on inflation,” Powell said. “We’re not saying, ‘mission accomplished’ … but I have to say, though, we’re encouraged by the progress that we have made.”

“The U.S. economy is in a good place,” he added, “and our decision today is designed to keep it there.”

Though the central bank now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities.

Powell was pressed at his news conference about whether the Fed’s decision to cut its key rate by an unusually large half-point is an acknowledgement that it waited too long to begin reducing borrowing rates.

“We don’t think we’re behind,” he replied. “We think this is timely. But I think you can take this as a sign of our commitment not to get behind. We’re not seeing rising (unemployment) claims, not seeing rising layoffs, not hearing from companies that that’s something that’s going to happen.”

He added: “There is thinking that the time to support the labor market is when it’s strong and not when you begin to see the layoffs. We don’t think we need to see further loosening in labor market conditions to get inflation down to 2 percent.”

The Associated Press contributed to this report. Contact Patrick Blennerhassett at pblennerhassett@reviewjournal.com.