By A.J. Kaufman, Managing Editor
Following a long road full of pressure and critiques, the Federal Reserve slashed interest rates at its September meeting, as concerns about a job-market slowdown seemingly overrode worries about inflation.
For months, President Donald Trump urged the Fed to lower interest rates in an effort to boost economic performance and to also reduce interest payments on government debt. The Fed declined, opting to keep interest rates steady as policymakers analyzed the effects of the administration’s tariffs.
But in late August, speaking at an annual gathering in Wyoming, Federal Reserve Chairman Jerome Powell said, “The effects of tariffs on consumer prices are now clearly visible.” He added that the Fed expected those price increases to accumulate during the coming months. Powell claimed the “balance of risks appears to be shifting” in light of a hiring slowdown this summer — especially the dismal August jobs report — and recent downward revisions to labor market data that led more officials to suggest they wish to cut. As the Fed said they would “proceed carefully,” Powell hinted at the possibility of changes to interest rates, saying before Labor Day, “The shifting balance of risks may warrant adjusting our policy stance.”
The Fed indeed lowered its benchmark rate on Sept. 17 by a quarter percentage point — bringing it to a range of 4% to 4.25% — with projections of two additional rate cuts this year.
The morning after the rate cut, the Wall Street Journal editorialized that “Coupled with those inflation projections, the message is that the Fed will tolerate higher inflation for longer to take pre-emptive action to shore up an economy that may or may not need the help.”
The financial markets treated the prospect of a rate cut as a seismic event, with most sentiment surrounding the prospect decidedly positive. But viewed as a fundamental economic event, the outlook is murky.
The Fed lowered its target rate three times from September until December 2024. Last year’s cuts did not work as a stimulus and have not lowered important market interest rates. Why should a different outcome be expected this time?
Forbes Magazine ran a thorough 2,500-word essay in late August — before the cuts were implemented — complete with 10 informative graphs, looking back a half-century to conclude that the Fed’s interest rate policy does not necessarily maintain meaningful influence over broader credit conditions.
The author concluded that, “Market interest rates have not responded to the past three interest rate cuts in the way policy makers at the Federal Reserve intended. Instead of lower borrowing costs, the result has been significantly higher cost of credit for consumers and businesses in all the most important categories: Treasury bonds, corporate bonds, mortgage rates. Should we expect a different outcome from the next rate cut in September?”
Locally, how does this affect our market, specifically the much-debated housing situation?
Long-time regional analyst Don Fenley recently opined that the housing market is shifting.
He noted sales are at similar levels to last year with so-called move-up homes continuing to anchor activity. Luxury construction is gaining momentum, but affordable options remain scarce. Cash buyers are now shaping one in four deals, while rising HOA fees are an additional cost to a family’s monthly budget.
In existence for more than 90 years, Knoxville TVA Employees Credit Union (KTVAECU) currently has four locations in the Tri-Cities. The Business Journal reached out to their Vice President of Real Estate Lending, Kendra Carpenter, for some concise insight.
“Overall, we do not expect a dramatic change in home loan rates throughout the remainder of this year,” Carpenter said. “As we move into 2026, we are hopeful to see a slight trend downward.”
Regardless, the U.S. economy is stuck with uncertainty. Hiring has slowed dramatically, while inflation remains too high. Should the Fed, and our leaders, worry more about people who are struggling to find work, or do they focus more on the struggles many Americans face in keeping up with rising costs for groceries and related items?
