What impact has the Federal Reserve's 75 basis points rate cut had on the U.S. economy this year?

This year, the Federal Reserve's shift to easing has resulted in a cumulative interest rate cut of 75 basis points. What impact does this have on the U.S. economy?

On November 25th, Goldman Sachs pointed out in its latest research report that its economic model shows that, when considering interest rate changes alone, a 100 basis point cut is expected to boost GDP growth by about 0.05%-0.1% over the next year and a half, accounting for 5%-10% of the total impact.

Although the interest rate cuts that have already been priced in by the market have a relatively limited overall impact on the economy, their role in stimulating consumption expenditure and debt repayment among highly indebted households and small businesses is more pronounced. Interest rate cuts help reduce the risk of economic downturns and decrease the likelihood of default or bankruptcy among vulnerable households and businesses. Even in the face of potential negative shocks to the economy in the future, consumers and businesses can more easily obtain loans and financing support.

Certain sectors of the U.S. economy are more sensitive to short-term interest rates, so the majority of the impact of interest rate cuts will only be felt after the cuts are implemented. Specifically:

• Household income and consumption: Interest rate cuts may reduce the total interest income of households (including interest from bank deposits, certificates of deposit, and money market funds), which could negatively impact consumption ("income effect"). However, interest rate cuts may also reduce households' savings motivation, thereby increasing consumption ("substitution effect"). According to Goldman Sachs research, the substitution effect typically outweighs the income effect.
• Consumer debt: About 30% of households' non-mortgage loans are closely related to short-term interest rates, especially credit card debt. Goldman Sachs estimates that for every 100 basis point decrease in interest rates, household interest expenses will decrease by about 0.1% of household income. Although this impact is relatively mild in terms of overall consumption expenditure, it will be more significant in consumption categories with a high proportion of indebted households.
• Small business financing: For small businesses, especially non-public companies, more than half of their borrowing is related to short-term interest rates. Interest rate cuts will significantly reduce these businesses' interest expenses, alleviating financial pressure, especially for those that are operating at a loss and facing a high interest rate environment.

According to Goldman Sachs' research report, the Federal Reserve's interest rate cuts typically begin to have an impact as soon as the market anticipates the changes. Particularly when the market expects interest rate changes and reflects them in long-term borrowing rates, the economic response is almost immediate. However, the actual impact of interest rate cuts is not limited to the rates themselves but also includes how these changes are transmitted through different sectors of the economy