Brian Lehrer: Brian Lehrer on WNYC. Later today, the Federal Reserve is expected to announce its first interest rate cut since the COVID-19 pandemic began. The move could mark a major economic milestone after more than two years of inflation peaking at close to 10%, though it's way down from that now. That's had Americans experiencing a higher cost of living. It's unclear just how big of a cut the Central Bank might make. It usually prefers to move in increments of a quarter point. This time, a half point is also on the table.

While it sounds like a small number, even one-half of a percentage point, it can make a big impact on the US economy, everything from borrower interest rates to how many workers employers might hire. Here to explain the stakes and how it might affect Americans' finances and to help take your calls and stories about this, as well as your questions, is Nick Timiraos, chief economics correspondent for The Wall Street Journal. Hi, Nick. Thanks for coming on. Welcome to WNYC.

Nick Timiraos: Thanks for having me, Brian.

Brian Lehrer: Listeners, we'll invite your calls right from the top here. Any of you with businesses or looking to buy or sell a home or with savings accounts that bear interest, or anyone else with a story of how interest rates affect your life, what are you rooting for today? If you feel like you have a rooting interest, or any question for our guest from The Wall Street Journal, 212433 WNYC 212-433-9692. Can I ask you to explain first what they may be thinking inside the Fed? The difference is between a quarter point cut and a half point cut coming down from around 5%. That doesn't seem like a whole lot of difference, but I guess that's what they're scratching their heads over.

Nick Timiraos: Yes, that's right, Brian. It's a tactical question that might, might offer clues about their broader strategy. What really matters for borrowers and financial markets is where you see rates going over the next several months, because investors in bond markets are looking ahead where they think the Fed is likely to go. Whatever the Fed decides to do today could offer a signal about how fast do they think they're going to cut interest rates? How do they see the risks right now of either inflation being a little bit too firm, which is why they've waited this long to cut interest rates?

The Fed chair, Jay Powell, has been talking for nine months about potentially cutting interest rates. The other risk that they're trying to manage against is that the labor market slows down more than the Fed now thinks would be necessary. If you go back a couple of years, Fed officials were talking as if they thought we really needed to slow down the economy and the unemployment rate would have to go up to get a grip on inflation. They're not talking like that anymore because inflation has come down. The decision they're making today, a quarter point or a half point, could have implications for their broader strategy.

The strategy they're thinking about to get rates down, if you back up, they raised rates a lot, a lot more than anybody expected in '22 and '23 because inflation was a lot worse than anybody expected, but now that inflation's come back down, not all the way to their goal. They have a 2% inflation target, and inflation is at about 2.5%. It was as high as 7% two years ago. They're much closer to their goal, but interest rates are still where they left them when they thought the risk of inflation being higher was much more acute than it is now. That's the challenge that policymakers are wrestling with and that investors are spending a lot of time sweating these details to try to figure out.

Brian Lehrer: Do you think they have a kind of formula in their heads that says if we only cut rates by a quarter of a point, it's not going to do enough? Well, that X number of more Americans are going to be unemployed as a result, compared to half a point.

Nick Timiraos: The way I think about it is they are trying to manage right now against different risks. They call it risk management. Which risks do you think are the hardest or the most hazardous problems for the economy? For most of the last two years, it was high inflation, but now they're talking as if they see the risks of an unwelcome increase in the unemployment rate as a bigger risk. Brian, when the unemployment rate goes up by a little bit, it tends to go up by a lot more because there's sort of a self fulfilling cycle. People aren't finding jobs as easily, so they're pulling back on spending.

If people are spending less, businesses have less revenue, so they hire less, or maybe they start firing. It's really that point at which businesses start to lay people off that the economy goes into a recession. The risks for the Fed have shifted, and this question about, well, do you do a quarter point or a half point? I think it comes down to, for some people, particularly for people who are advocating for the larger move today, they're going to frame it in terms of regret avoidance. What do I mean by that? What are you going to regret more today?

If you cut by a half point, interest rates will still be at a historically high level. If you look back over the last 15 years, an interest rate just below 5% was something we haven't seen since before 2008. If you cut interest rates by a half point to a still high level, and the economy is fine over the next month or two before your next meeting, they'll meet again in November, then you probably feel okay. If you cut by a quarter point and things really get worse, then you're going to say, "Oh, shoot, we need to do more." The people who are arguing for the larger move are going to say, there's just less risk right now.

The people who are arguing for a smaller move will point to some of what-- Well, what does the Fed know that we don't? Are they scared? Are they panicking? Do they think they have made a mistake? There's a lot of communication involved that'll be important today around why did you do whatever you decided to do.

Brian Lehrer: We'll get into what the rate cut might mean in a lot of regular people's lives, but just tell me first, from where you sit as chief economics correspondent for The Wall Street Journal, is there a consensus over whether these high interest rates have even been the thing that has brought inflation back down? There's a counterargument that says it wasn't low interest rates that brought the inflation on in the first place. It was supply chain disruptions because of the pandemic, and as those things have eased around the world, then, of course, inflation has come down. This has never had anything to do with interest rates. Maybe they inflicted pain unnecessarily.

Nick Timiraos: Brian, that is a question that economists with PhDs will be answering 50 years from now. There's no consensus yet, and there may not be a consensus in our lifetimes, but what I would say to that is clearly this inflation was unusual. It represented the collision between very strong demand, particularly as the economy was getting back on its feet for goods. Everybody wanted to go out and buy stuff. We were filling our homes with stuff, or you were buying homes and then filling them with stuff. You couldnt spend money at restaurants or Taylor Swift concerts.

You had the collision of very strong demand with a supply chain that just couldnt meet that demand, and so what happens in our economy? Prices go up. That is the mechanism for controlling or balancing supply and demand. Yes, there is an argument that says a lot of the disinflation or the decline in inflation that we've seen would have happened anyway as the supply chain healed and in fact, that was what the Fed initially said in 2021 when they weren't raising interest rates. They said, well, we think this is just a supply thing, so we shouldn't stomp on the brakes.

What happened in 2022 was inflation wasn't getting better. Demand was very strong, and the Fed was worried that if people expect inflation to be higher in the future, that will sustain higher inflation in the future. That is what we saw in the 1970s, and that is a pernicious cycle of self fulfilling higher inflation expectations that you really want to avoid. Even if you could say, well, the Fed's rate increases didn't actually constrain demand that much, the Fed certainly is going to argue that had they not acted, if they had just left interest rates at a very low level, we could have still had this inflation inferno continue for longer.

Brian Lehrer: All right. Well, as I said at the beginning of the segment, we're inviting listeners who have personal stories about how interest rates going up or down affect you. You're invited to call in or text us. Let's take a phone call right now, 212433 WNYC. Jed in Nassau County, you're on WNYC. Hi, Jed.

Jed: Good morning. How are you?

Brian Lehrer: Good. How are you?

Jed: Many, many year listener, first time caller.

Brian Lehrer: Glad you're on.

Jed: Let me start off by explaining my situation. I have a mortgage, a 30 year mortgage with a 10-year loan that I-- If I can explain that, I will, I need to, I will.

Brian Lehrer: An adjustable-rate mortgage, so it fluctuates with the interest rates. Go ahead.

Jed: It was steady for 10 years, but it's about to roll over in October, and so my interest rate, which was booked in 2014, and now my interest rate, which is going to start next month, is, there's a sizable difference. My interest on my loan is going to double. I'm over 65. I'm on a fixed income, and I don't know where I'm going to be able to come up with the money to pay the interest over the next twelve months.

Brian Lehrer: Jed, that's a really serious concern, and I'm sure you speak for a lot of people. It sounds like you want to add something. I'll let you follow up in a minute, but to our guests from The Wall Street Journal, I mean, he laid it out pretty clearly. That's a real concern for people with certain kinds of mortgages. Since this mortgage has been having a steady interest rate, if I understand him correctly, for the last 10 years, now it gets reevaluated this October. Well, maybe the interest rates are coming down today by a quarter or a half a point compared to yesterday, but compared to 10 years ago, they're still going to be much higher, and he doesn't know if he's going to be able to continue to pay his mortgage.

Nick Timiraos: This is a great example of, we've had such a big increase in interest rates that even dialing it back a little bit now and probably a little bit more over the rest of the year, it's not just homeowners in this situation. Businesses that locked in five or seven year loans when interest rates were a lot lower in 2018, 2020, 2021, as those loans refinance and they have to roll them over, if interest rates don't come down a lot quickly for those businesses or those borrowers or these homeowners, that is going to have a bite.

I think one thing we saw when the Fed was raising interest rates was that because people had locked in low borrowing costs, the economy proved more resilient to the effects of higher interest rates. One question I have right now is, as the Fed lowers interest rates, could those same buffers that sort of inhibited the transmission of interest rates into the US economy when the Fed was tightening, could it also slow the effect of the easing? That would argue for the Fed actually having to cut rates more than what people are thinking right now. We won't know until we see how the economy handles here.

Brian Lehrer: Jed, did you want to add something else?

Jed: Yes, I wanted to say that there-- I've tried to investigate New York state or federal programs to help somebody like me in this situation to keep my home. They don't exist. The lender doesn't really have-- The lender, I'm saying the mortgage company, the bank, doesn't have any programs in place to help me as well. That's a big hole in the fabric of our reliance on government to help us keep our homes.

Brian Lehrer: That's such an important point.

Jed: I had all kinds of situations over the years.

Brian Lehrer: Jed, thank you and call us again, and maybe we can get you an answer. If not in this segment, maybe this is worth doing a separate segment on, because, Nick, we had a caller in our previous segment on a different topic from a group called the Partnership to End Homelessness. I think they're working mostly with people who live in the city whose rent is going up and they can't afford to keep paying the rent. Here is a caller from the suburbs who's a homeowner, and because his interest rate is going to spike as a result of Fed policy and maybe not be able to stay in his home, there should be a program for people like him. He says there's not. Is there to your knowledge?

Nick Timiraos: Well, it really depends on who owns that loan, the company that services the mortgage. It's a fairly complex system for housing finance that we have in this country. One broader point I would make is that it's true that what the Fed does today will, it'll hit people differently. If you are out there right now looking to buy a house, mortgage rates have already anticipated. Mortgage investors have sort of already jumped ahead. They look at where they think the Fed is going to go, and so interest rates over the last several weeks have fallen quite a bit for 30 year fixed rate mortgages, down to 6.15% last week.

I think that's the lowest in two years. The Mortgage Bankers Association reported that today. The mortgage rate doesn't actually change when the Fed cuts rates. It changes in anticipation of what the Fed's going to do. If you have a variable rate loan, credit card debt, you haven't felt the benefit of it yet, you will benefit when the Fed actually cuts rates. Then on the other side from your caller, I get a lot of emails from readers who say, I'm finally earning 5% on my cash that I have in a CD at the bank. Why is the Fed so eager to cut interest rates? I'm finally getting a good return on a safe liquid asset. Why does this have to change?

Brian Lehrer: That could also ding someone in Jed's situation. We don't know his whole situation, but he said he's a senior citizen. A lot of people and obviously lower interest rates are in his interest because of his mortgage, but a lot of people who are senior citizens, even if they were in the stock market with 401Ks or whatever, tend to get out because they don't want to take that risk of a stock market crash. Then their savings never come back in their lifetimes, so they move more into traditional interest-bearing accounts. With those rates being close to zero for so many years before this little spike, they had a nice little bit of a bubble, and now the government's going to take that away.

Nick Timiraos: Yes, that gets to sort of-- Monetary policy is a blunt tool. The distributional impacts go in different directions, but the Fed really has one tool. When people were saying a few years ago, "Well, inflation is not going to be a problem, but if it is, the Fed can use its tools." What they're saying is the Fed can raise interest rates to try to slow down demand. At any given Fed meeting, there are really only three choices, raise, hold, or cut. It has lots of different effects.

Brian Lehrer: That's the blunt instrument they have. Ben and East Flatbush, you're on WNYC. Hello, Ben.

Ben: Oh, hi. I bought a home this past year, and I got a locked-in rate of 3.75. It was pretty amazing, but it was a complicated sale, and it lasted several months, and fortunately, that was locked in, but it was going to expire just a couple of days after we finally closed. That would have been a problem because by the time we closed, rates were well above 6%, and that would have made it impossible for me to buy that home. I feel very lucky, but I was someone who was almost priced out of the market by the Fed itself.

Brian Lehrer: Are you rooting for anything today, either on behalf of yourself or other people who might be in similar positions to what you were in?

Ben: Well, I certainly feel for the previous caller. Yes, and I think that they should lower-- Paying a little bit of attention, I think it should be a half point, but ultimately it's okay. I'm happy, but it just is an example of how much it affects individuals all across the country.

Brian Lehrer: Ben, thank you very much. I don't know where he got that three-point-something percent loan last year. I guess it went away anyway, so we can't give everybody else a tip on that for a mortgage. It's not just about mortgages. There are other things that are affected by this. I want to make sure we get to a few of them before we run out of time. Credit cards, car loans. What about cars? Which, according to some reporting, seem to be recovering from pandemic-related supply chain issues, and that cars are perhaps the consumer product most responsive to the Fed cut. Is that your understanding?

Nick Timiraos: Typically, you see anything that requires a lot of debt to make a purchase would benefit from lower rates. I think as we've talked about now, even after the Fed cuts interest rates today, no matter how large the cut is, rates are-- They're not going to feel low. If we went through several years of 0% interest rates, we've lived through, we lived through that. You can't unsee that. That's an issue. I think the other interesting development in the economy right now is that you see businesses doing more discounts, sales promotions, value menus, and that is a sign that the inflation pressures are easing.

Businesses are competing for your business again. They don't want to lose market share, and they pushed price aggressively over the last couple of years, in part because their costs were going up a lot, in part because they could. I think that'll be very interesting dynamic to watch here. If inflation were to start to go up again, that would be a problem for the Fed, and that would limit how much they would cut over the next year.

Brian Lehrer: And credit card rates. I think you might have referred to this before. Not going down right away, not in anticipation. Maybe they'll go down to some degree once the Fed cuts its rate, but to these callers with their mortgages, listener writes, has anyone ever made a serious plan to decouple mortgage rates from broader interest rates? Interesting question, Nick.

Nick Timiraos: Well, we kind of do that in this country. By far the most popular product is a 30-year fixed-rate mortgage. Over 80% of homeowners with a mortgage have a 30 year loan. One of the frustrations you sometimes hear in Central Banking circles is that when they raise interest rates, it doesn't actually transmit to the economy the way it does in other countries like Canada or the UK, where people have shorter-term mortgages. We do have sort of an unusual situation in the United States, where most people prefer having a long-term fixed-rate loan.

When the Fed changes interest rates, of course, that influences the price of the 30-year mortgage rate, but unlike our first caller that we heard from, who is now dealing with the fact that he's going to have a payment shock when his loan recasts or resets here. Most Americans don't have that. If you lived in Canada right now and you took out a five-year loan four years ago, and interest rates are much higher all across the country, those are kitchen table conversations that people are having. What are we going to do? Where are we going to come up with the money that you don't have so much in the United States?

Brian Lehrer: Another tax listener writes, I lend money to the federal government. Falling market interest rates have already affected my income. That person adds, these are not high interest rates. 5% is a normal interest rate. I lend money to the federal government, I have a feeling he's saying, I don't know if it's a man or a woman. They're saying, I invest in very safe US treasury bonds to get the interest that they offer. I lend money to the federal government, and then that judgment that these are not high interest rates. 5% is a normal interest rate.

For a lot of people, depending on your age, 5% was the normal interest rate, and that didn't seem like a high interest rate. Interest rates got close to 20% in the 1980s when they were really trying to knock down inflation. Zero, which we had close to zero since the financial crisis 15 and more years ago, is not normal. Either that 5% is like normal, or is that just old fashioned thinking, outdated?

Nick Timiraos: Well, Brian, I think it's a matter of your perspective. I don't think people walked around in 1980 saying a 20% interest rate was normal, but of course, today, if you live through that, then you bought your first house when it was 18% on the prime rate or something like that. Then, of course, the perspective is that 5% is a normal rate, its not a high rate. I think the context that were coming from where we had from 2008 until 2022, a period of very low interest rates. If you think about the last time Jay Powell was raising and then cutting interest rates, they barely got interest rates above two and a quarter percent, which was roughly the inflation rate at that time.

You had a barely positive, inflation adjusted real interest rate, and then they started cutting because the economy was slowing. Businesses and people who pay attention to this stuff began to say, well, interest rates are never going to go above 3% for a long time because the world has just changed. Then the pandemic hit. We had this inflation, and in almost the blink of an eye, interest rates went from zero to 5%. Again, it's a matter of what timeframe you want to use. I think if you had a period where interest rates slowly, gently, gradually crept up from zero to 5%, that's different from the full-on sprint that really, you saw that destabilize certain banks a few years ago when Silicon Valley bank and First Republic Bank failed.

Brian Lehrer: Last thing, an explicitly political question. Do Harris and Trump have different positions on this or positions at all? The Fed is supposed to be independent. I think Trump talks about watering down or ending that independence. As president, if he were elected again, he could direct whether interest rates go up or down or have influence on it. Does Harris take a position on that? Are either of them weighing in, as far as you know, on what the Fed should do today?

Nick Timiraos: That's a good question, Brian. Just so everybody understands Fed independence, when people talk about that, what they're referring to is the idea that the Fed sets interest rates without being told what to do by Congress or by the White House. The president does get to influence the Fed. He or she puts the people on the Fed's board. There's a seven member board in Washington that is half of the rate setting committee. You influence the Fed by putting people on the board, but then the norm over the last 30 years has been you don't tell them what to do.

Donald Trump has clearly a different opinion. He thinks he should be able to have input on what the Fed is going to do. Kamala Harris has said that she will honor the standard set by Joe Biden, that he doesn't comment on what the Fed should do. That hasn't stopped other Democrats from telling the Fed what to do. Elizabeth Warren, the Democratic senator from Massachusetts, sent a letter to Jay Powell this week saying, I want a three-quarter point interest rate cut because you raised interest rates too much. There are different views. It is a little bit awkward optically to be cutting interest rates right before the election.

The Fed and what Paula said, they're going to do what they think is the right thing for the economy. You can overthink the politics. If you withhold something that you think might be appropriate because there's an election and then the economy suffers, well, then you're sort of interfering in the election. There's no way for them to win on the bad political optics here, no matter what they do. I think that probably makes it easier to just say what's the right thing for us to do, and let's do it and we'll defend it. If it works out, nobody's really going to second-guess it. If it doesn't work out, you're going to have bigger problems because the economy is not going to be doing well.

Brian Lehrer: Nick Timiraos, chief economics correspondent for The Wall Street Journal, thanks so much for coming on.

Nick Timiraos: Thanks for having me, Brian.

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