9月27日，Timiraos撰文表示，Source: Wall Street See
"New American Fed Communication Agency" stated that the US economy's soft landing ultimately requires a rebound in bank loans, yet the loan growth rate has almost stagnated over the past year. Many businesses and households have locked in the low interest rates before rate hikes, even though the Federal Reserve is currently cutting rates significantly, the distance to ultra-low interest rates is still far away. People's willingness to borrow is low, and the impact of rate cuts on boosting the economy will be limited.
Amid the Federal Reserve's significant 50 basis point rate cut to boost market optimism, Nick Timiraos, a Wall Street Journal journalist known as the 'New Federal Reserve News Agency', raised a concern: rate cuts do not guarantee an 'economic soft landing,' and whether the decrease in borrowing costs can stimulate new investments and spending remains a challenge.
On September 27, Timiraos wrote that achieving a soft landing, lowering the inflation rate to the target set by the Federal Reserve without causing a significant deterioration in the labor market, is a daunting task. This ultimately requires a rebound in new loan growth. However, over the past year in the United States, bank loan growth has slowed to almost a standstill, which is very rare outside of economic recession periods.
Last week, the Federal Reserve cut the benchmark interest rate by 50 basis points to a range of 4.75% to 5%. Federal Reserve officials expect to cut rates by another 50 basis points by December, bringing the benchmark rate down to a range of 4.25% to 4.5%.
However, many borrowers locked in low rates before the Federal Reserve began raising rates in the previous years, so they still face relatively high borrowing costs. Even with rate cuts, the willingness of businesses and households to borrow may still be subdued because current rates are higher than fixed loan rates from a few years ago. If borrowers are unwilling to apply for new loans, the stimulative effect of rate cuts on the economy will be very limited.
Timiraos pointed out that the key issue lies in the gap between the marginal cost of debt (currently decreasing) and the average debt rate (potentially still rising). Due to the Federal Reserve rapidly increasing rates after historically low borrowing costs in the previous years, despite the current rate cuts, the average debt rates in many industries are still lower than the marginal cost of new credit.
Many Americans hold long-term, fixed-rate mortgages, and the rate cut has not boosted demand.
The subdued U.S. housing demand over the past year indicates that borrowers are avoiding high rates and choosing to wait and see.
According to the data from the Federal Home Loan Mortgage Corporation (FHLMC), the interest rate on a 30-year fixed-rate mortgage in the usa dropped to less than 6.1% last week, the lowest in two years, compared to 7.2% in May. However, according to the Intercontinental Exchange (ICE) loan level data, the average interest rate for delinquent mortgages in July was 3.9%. Over the past two years, this rate has remained almost unchanged because a considerable number of Americans hold long-term, fixed-rate mortgages.
The decrease in interest rates has not significantly improved housing affordability, with current affordability at historically low levels. Industry experts point out that the relaxed policies have not led to a noticeable increase in demand.
"The ultra-low interest rates are still far away", but rate cuts have boosted market sentiment.
For the current loose monetary policy cycle to be transmitted to a wider economic sector, it faces multiple challenges. Jon Faust, senior advisor to Federal Reserve Chairman Powell, pointed out that Fed officials must accept the fact that their understanding of how monetary policy transmits to a broader economic sector is very limited.
Some corporate executives are cautious about rate cuts. The CEO of private equity firm Compass Diversified stated that even a full percentage point rate cut would not have much effect because we are still far from ultra-low rates."
Timiraos stated that despite this, investors remain optimistic about rate cuts, believing that the Federal Reserve still has significant room for rate cuts. Rate cuts have boosted market sentiment, implying that if there are signs of economic weakness, the Fed will act more quickly in response. In addition, rate cuts provide breathing room for smaller, higher-risk companies with floating-rate debt.
Editor / jayden