The Fed meets this week, could announce rate cuts. What you need to know

Will they or won’t they?

The interest rate-setting committee of the Federal Reserve will meet starting Tuesday to discuss the economy and a potential cut to the central bank’s benchmark rate — a decision that will affect the pricing of home, auto and business loans, credit card rates, the rates for savers and so on.

The aftermath of the pandemic, supply chain issues and pent-up demand sent prices soaring worldwide. After two years of fighting inflation by raising and keeping elevated its benchmark rate, Fed Chairman Jerome Powell signaled Aug. 23 that it was nearing time for a cut amid signs of economic slowing. Wall Street seems to expect a cut of a quarter point.

The Fed has tried to cool the economy without causing it to tumble into recession — a delicate dance. Here’s what you need to know about this week’s Federal Reserve Open Market Committee meeting.

The Fed sets only one rate, but it’s the key rate.

The Open Market Committee meets about eight times a year to consider changes to the Federal Funds Rate, which is the rate charged to huge banks for overnight loans.

That rate is the benchmark for the rates the banks then charge for other loans, so it ripples through the financial system and, ultimately, the entire economy.

People and companies that loan money need to get a return higher than what they pay to borrow money. So, they charge a somewhat higher rate than they themselves pay.

And you can trace the chain of rates back to the original rate, which is set by the Fed.

What the Fed does will affect you personally.

But only if you buy a house and need a mortgage. Or you own a home and want to refinance it. Or you run a business that needs to borrow money. Or have money in a bank collecting interest. Or if you have a credit card.

Time to buy? How rate cuts will impact housing affordability

Credit: J. Scott Trubey

In other words, if you participate in the financial system, your personal economic well-being is shaped every day by the Fed’s actions.

The Fed has a sometimes contradictory mission.

Alexander Hamilton wanted a central bank, an idea that was often opposed by those — like Thomas Jefferson and farmers — who reflexively resented the control that big, city capital could exert.

The nation’s first attempt at the concept lasted only a few decades. Efforts to re-create it were crushed by President Andrew Jackson.

But calls for an institution that would provide some stability continued, especially when there seemed no way to escape the cycles of the economy. Finally, after several painful recessions, — most notably the Panic of 1893, which shook the nation — the Federal Reserve was created by Congress as the nation’s central bank.

A 1977 amendment to that law gave the Fed two mandates: promote job creation and keep prices as stable as possible.

The problem is that the most effective way for the Fed to stop prices from rising too much is to cause a recession that kills the job market.

The Fed has been known to mess up.

When the economy starts heating up, job growth and wage growth and rising expectations combine to push up inflation.

So, when those prices start to accelerate, the Fed historically starts raising its benchmark rate. That makes borrowing more expensive for consumers and companies alike, and that tends to slow growth.

Or, as has often been said, the Fed’s job is to take away the punch bowel whenever the part really gets rolling.

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Fed officials say that they want to slow growth only enough to stop inflation, not enough to cause a recession. That is, they want “a soft landing,” not an economic crash.

Problem is, there’s a lag — it takes a while for change in the benchmark Fed rate to ripple through the economy.

So, by the time the Fed sees the impact of its policies and changes course, there’s risk that it could be too late to stop the economy from a downturn.

This time there’s hope. But no guarantee.

In the early months of the pandemic, the Fed kept its benchmark rate near zero in an attempt to prevent massive job loss, home foreclosures and economic pain.

But in 2022, inflation roared to life. While much of the fuel for that fire came from federal spending, pandemic snarls in supply chains and changes in consumer habits, at least some of it was because of easy money — that is, low interest rates.

The Fed started hiking rates like nobody’s business.

Inflation started dropping after the summer of 2023, but the rate-hike campaign was so aggressive, most economists agreed that recession was likely. Job growth decelerated and the housing market was deeply chilled, yet the economy has plowed ahead, albeit at an ever-slowing speed.

The effect of rates takes a while, so there’s still some fear that a recession is already in the cards. But the numbers remain positive. Job growth has fallen, but there’s hope that it won’t crash.

Even when the Fed does something bold, it does it cautiously .

In March 2022, the Fed’s benchmark rate was near zero. By August of the next year, it was 5.33%. That was, percentage-wise, the most aggressive rate hike campaign on record, yet it was done in a small steps — 11 of them.

In any but an emergency situation, that is the Fed’s style: get the job done, but do not spook people.

Now, the Fed is poised to start cutting. Yes, a big move — a half-point cut — would be an exclamation point. The cut would be hard stop on worries about inflation, a no-doubt-about-it slam dunk that says, the top job is keeping the economy out of the ditch.

Yeah, but the smart money says the cut will be a quarter-point. And then, the meeting after that, another quarter-point. And then, the meeting after that …

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