New York Federal Reserve News Agency: Rate cuts have not significantly boosted demand, "soft landing" still unknown

Amidst the significant 50 basis point rate cut by the Federal Reserve to boost market optimism, Nick Timiraos, a Wall Street Journal reporter known as the "New Fed News Agency," expressed a concern: cutting rates does not guarantee an "economic soft landing," and whether the decline in borrowing costs can stimulate new investments and spending remains a challenge.

On September 27th, Timiraos wrote that achieving a soft landing, reducing 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 the growth of new loans. However, in the past year, the growth rate of bank loans in the United States has slowed to almost a standstill, which is very rare outside of an economic recession.

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 to a range of 4.25% to 4.5%.

However, many borrowers locked in low rates before the Federal Reserve raised rates in previous years, and they still face relatively high borrowing costs. Even with the rate cut, 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 not willing 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 (which may still be rising). Due to the Federal Reserve rapidly raising rates after historically low borrowing costs in previous years, despite the current rate cut, the average debt rates in many industries are still lower than the marginal cost of new credit.

Many Americans with long-term fixed-rate mortgages did not see increased demand from rate cuts

The sluggish demand for housing in the past year in the United States indicates that borrowers are choosing to wait to avoid high rates.

According to data from Freddie Mac (Federal Home Loan Mortgage Corporation), the interest rate for a 30-year fixed-rate mortgage in the United States dropped to less than 6.1% last week, the lowest in two years, compared to 7.2% in May. However, according to data from the Intercontinental Exchange (ICE) on loan levels, the average rate for outstanding mortgages in July was 3.9%. This rate has remained almost unchanged in the past two years, as many Americans hold long-term fixed-rate mortgages.

The rate cut did not significantly improve housing affordability, as current affordability is at a historical low. Industry experts point out that the policy easing did not bring about a noticeable increase in demand.

"Still far from ultra-low rates," but rate cuts boosted market sentiment

Transmitting the current loose monetary policy to a broader economic sphere faces multiple challenges. Jon Faust, a senior advisor to Powell, pointed out that Federal Reserve officials must accept the fact that their understanding of how monetary policy transmits to a broader economic sphere is very limited.

Some corporate executives are cautious about rate cuts. The CEO of private equity investment company Compass Diversified stated that even a full percentage point rate cut "won't make much difference," because we are still far from ultra-low rates. Timiraos said that despite this, investors remain optimistic about rate cuts, believing that the Fed still has a significant room for rate cuts. Rate cuts have boosted market sentiment, suggesting that if there are signs of economic weakness, the Fed will act more quickly to respond. In addition, for smaller companies with higher risks and floating rate debts, rate cuts provide them with a breathing space