(NewsNation) — Annual inflation fell to its lowest level in more than three years in July, setting up the Federal Reserve for a September interest rate cut that could help Americans’ wallets.
Consumer prices rose 2.9% in July compared to a year earlier, according to Wednesday’s report from the Labor Department. It’s the slowest year-over-year pace since March 2021 and a sign inflation is heading in the right direction.
The Federal Reserve chose not to cut interest rates at its July meeting, citing the need for additional evidence inflation is slowing. With the new data this week, economists expect a rate cut at the next Fed meeting in mid-September.
“Today’s data has reassured markets that they will get a rate cut in September and December,” Realtor.com senior economist Ralph McLaughlin said in a statement.
Bankrate senior economic analyst Mark Hamrick shared that sentiment: “It seems reasonable to assume that interest rates are currently too restrictive.”
If the Fed decides to cut its key interest rate — which is currently at a 23-year high — consumers could see lower borrowing costs for home loans and credit cards, but the extent of the impact will depend on the size of the cut.
How much will the Fed cut rates?
The Fed changes its benchmark interest rate in multiples of 25 basis points, or 0.25% percentage points. A quarter-point rate cut in September would bring the Fed funds rate to a range of 5% to 5.25%, whereas a half-point rate cut would ease borrowing costs even more, lowering the range to 4.75% to 5%.
The decision, economists say, will be based on how the economic data, particularly the unemployment rate, changes over the next month.
In a post on X, Harvard economist Jason Furman said he expects a half-point rate cut if the next jobs report is “weak”—that is, if the unemployment rate stays at 4.3% or rises. Otherwise, he thinks the Fed will go with a quarter-point cut.
Futures traders put the likelihood of a smaller rate cut, 0.25%, at 63%, while the probability of a larger 0.50% cut was 38% as of midday Wednesday, according to the CME FedWatch tool.
September’s rate cut could be the first of many as the Fed tries to pull off a “soft landing” — cooling inflation without tipping the economy into a recession.
“Generally, the rate-cutting cycle is not one-and-done,” said Lawrence Yun, chief economist at the National Association of Realtors (NAR). “Six to eight rounds of rate cuts all through 2025 look likely.”
In an interview with the Associated Press on Wednesday, a top Federal Reserve official warned that the Fed needs to cut its key interest rate before the job market weakens further. Otherwise, it could imperil the economy.
That official, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, did not say how large a rate cut he would favor.
What would a rate cut mean for mortgage rates?
Last week, mortgage rates plunged to their lowest level in over a year following a “likely overreaction” to the underwhelming July jobs report, Freddie Mac reported. The average rate on 30-year mortgages fell to 6.47%, down from 6.95% just over a month ago.
The drop in rates triggered a flood of mortgage refinancing applications, which were up nearly 60% from the same week a year ago. A September rate cut and a rising housing supply could push mortgage rates down even further.
“We expect the economy to land softly and housing inventory to continue to recover,” McLaughlin said. “This should put downward pressure on mortgage rates this fall and winter and will set the stage for a much better season for homebuyers in 2025.”
By the end of the year, Realtor.com is forecasting 6.3% mortgage rates, down from its previous estimate of 6.5%.
However, Yun warned that the drop in mortgage rates may be less than many were hoping for due to a “super-sized budget deficit.”
“The new normal for mortgage rates will be around 6% and definitely not to 4% as was before COVID,” he said in a statement Wednesday.
What about car loans?
For those waiting on lower rates to buy a new car, relief “is not right around the corner,” according to Cox Automotive chief economist Jonathan Smoke.
“It is doubtful that auto rates will rapidly decline as soon as the Fed starts cutting,” Smoke wrote after the Fed held rates steady in July.
He said auto loan performance has been “shaky,” and rates are “bound to be sticky on the way down.”
The average rate on a new car in July was 9.72%, up over 0.50% year over year but down from a peak of 10% in early June, Cox said. For used cars, the average rate is currently 14.2%, slightly off the 14.6% high in February.
Those rates are unlikely to decline much before the end of the year, Smoke said.
One bit of good news: Used car prices were down nearly 7% in the second quarter compared to a year earlier, according to new data from Edmunds. Prices for used electric vehicles have fallen even more, plunging more than 20% year over year.